Working Paper: CEPR ID: DP3289
Authors: Jürgen von Hagen; Jizhong Zhou
Abstract: We analyse the choice of exchange rate regimes of the 25 transition economies in Europe and the CIS after 1990. The empirical results show that the traditional Optimum Currency Area considerations provide relevant guidance for the exchange rate regime choices in these countries. Moreover, inflation rates, cumulative inflation differentials and the availability of international reserves influence regime choices. That is, macroeconomic stabilization and the ability to commit to a credible exchange rate peg play important roles in the determination of exchange rate regime choices. Large government deficits have ambiguous effects; they increase the likelihood of moving from a flexible exchange rate to an intermediate peg as well as the likelihood of moving from a fixed to an intermediate peg.
Keywords: exchange rate regimes; transition economies
JEL Codes: E52; F31; F33; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Traditional OCA considerations (L29) | exchange rate regime choices (F33) |
| High economic openness (F69) | fixed exchange rate regimes (F33) |
| Concentrated foreign trade (F10) | fixed exchange rate regimes (F33) |
| Larger cumulative inflation differentials (E31) | weak central bank credibility (E58) |
| weak central bank credibility (E58) | stable exchange rates (F31) |
| Availability of foreign exchange reserves (F31) | fixed exchange rate regimes (F33) |
| Current inflation rates (E31) | likelihood of sustaining fixed exchange rate regimes (F33) |
| CIS countries (P20) | preference for flexible exchange rate regimes (F33) |
| Past regime choices (E65) | current decisions (D70) |
| Previously adopted fixed exchange rate (F31) | less likely to shift to flexible regime (P39) |
| Large fiscal deficits (H69) | loosen exchange rate regimes (F33) |
| Rigidly fixed exchange rate (F33) | awareness of risks of speculative attacks (F31) |