Working Paper: CEPR ID: DP3799
Authors: Adam Szeidl
Abstract: This study intends to analyse the credibility of the Hungarian exchange rate regime preceding and during the Russian stock market crisis and devaluation (in 1998). Throughout the Paper the comparison with the similar regime in Poland is stressed. The basic tool applied is a measure of market imperfections, more precisely deviations from covered interest rate parity. The size, sign and dynamics of these deviations provide insight into the expectations of market participants. These in turn yield conclusions concerning the credibility and vulnerability of the regimes. Policy implications also follow.
Keywords: credibility; exchange rate regime; market liquidity; transition
JEL Codes: F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| breakdown of covered interest rate parity (CIP) (F31) | highly credible exchange rate regime with appreciation expectations (F31) |
| market pressures leading to deviations from CIP (L11) | investor expectations about the forint's future value (F31) |
| deviations observed in the forint markets (G15) | influenced by price manipulation and increased distrust among foreign investors (F31) |
| deviations observed in the forint markets (G15) | domestic investors maintained a degree of confidence in the regime (P34) |
| credibility of the regime was questioned during the crisis (H12) | decrease in credibility during the crisis period (H12) |
| CIP held for the Polish zloty (F31) | failed for the Hungarian forint (F31) |