BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 7/2002:
Financial contagion, interest rates and the role of the exchange rate as shock absorber in Central and Eastern Europe
Maurizio Michael Habib ()
Abstract: This paper studies the impact of external factors on daily
exchange rates and short-term interest rates in the Czech Republic, Hungary
and Poland during the period August 1997 – May 2001. I find that neither
exchange rates nor interest rates are influenced by short-term German
interest rates. Nevertheless, I show that shocks to emerging-market risk
premia had a significant impact on exchange rates in all three Central and
Eastern European countries and on interest rates in the Czech Republic. In
addition, studying the second moment of the variables, I demonstrate that
Czech and Polish exchange rates were affected by ‘volatility contagion’
coming from emerging markets. I find also some partial support for the
‘volatility contagion’ hypothesis on Czech interest rates. These findings
shed some doubts on the alleged theoretical ability of a floating exchange
rate – such as in the Czech Republic – to absorb external shocks and
insulate a country's domestic monetary policy completely. However, the
spill-over effect on Czech interest rates might be explained by the
‘managed’ nature of the exchange rate regime, thereby re-establishing some
credibility of the theory.
Keywords: exchange rates; short-term interest rates; volatility; Czech Republic; Hungary; Poland; (follow links to similar papers)
46 pages, July 11, 2002
Before downloading any of the electronic versions below
you should read our statement on
copyright.
Download GhostScript
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
dp0702.pdf 
Download Statistics
Questions (including download problems) about the papers in this series should be directed to Päivi Määttä ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Programing by
Design by Joachim Ekebom
