MONETARY SHOCKS AND REAL EXCHANGE RATE FLUCTUATIONS IN CEE COUNTRIES

• Main Authors: Nataša Erjavec, Boris Cota, Saša Jakšić
• Format: Article
• Language: English
• Published: Croatian Operational Research Society 2012-12-01
• Series: Croatian Operational Research Review
• Subjects: SVAR; blanchard-quah decomposition; impulse response function; macroeconomic shocks
• Online Access: http://hrcak.srce.hr/index.php?show=clanak&id_clanak_jezik=142564

The aim of this paper is to investigate the role of the exchange rate regime in absorbing macroeconomic shocks for a group of Central and East European countries (CEE). Whether the flexible exchange rate regime is beneficial for an economy depends on the capacity of the exchange rate to act as a shock absorber. An appropriate framework for assessing the role of the exchange rate is a structural vector autoregressive (SVAR) model. Impact of two types of macroeconomic shocks is estimated: nominal and real. The shocks are identified on the basis of Blanchard-Quah long run identification scheme which means that the restrictions are imposed on the long run responses while the short run dynamics is kept unrestricted. The importance of nominal and real shocks is assessed using the variance decomposition and the impulse response functions.