Lazarski University, Warsaw, Poland
To peg or not to peg? – an up-to- date crisis lesson from experience of Central and Eastern Europe.
The main aim of the paper is to examine if there is any relationship between an exchange rate regime choice and a macroeconomic stability. There is a lot of ambiguity around the role of an exchange rate regime in determining economy exposure to some external shocks. However, If we take a look at some current crisis episodes (of 2008), especially comparing experience of the hard peggers (like the Baltic states) with experience of the floaters (like Poland) it may encourage to formulate the hypothesis that the floating exchange rate is a better temporary solution for these transition economies that still stay out of the EURO zone, however applying for the participation in it. In my paper I use Frankel, Schmukler, and Serven (2004) model to explore whether the choice of exchange rate regime affects the sensitivity of the transition economies’ interest rates to the international interest rates. I also calculate Exchange Market Pressure Index (modified version of Eichengreen, Rose and Wyplosz, 1996) to observe if its behaviour can be dependent of the exchange rate regime choice. I use monthly data of the IMF IFS for Bulgaria, Czech, Estonia, Latvia, Lithuania, and Poland during 1995-2008. I also try to refer to some country specific 2008 crisis episode cases to conclude. My research results allow to formulate some recommendations concerning dilemmas connected with the exchange rate regime choice for transition economies that want to adopt EURO in nearest future.
Keywords: Exchange rate regime, crisis pressure, transition economies, EURO zone. JEL Classifications: E42, E44, F 36, G01.