Exchange rates and monetary fundamentals in CEE countries: Evidence from a panel approach

• DOI: 10.1016/j.jmacro.2014.05.005
• Publication Date: 2014-06-19T18:03:45Z
• Authors: Marek A. Dąbrowski; Monika Papież; Sławomir Śmiech
• Keywords: Causality

Abstract This paper examines whether the monetary model is a reasonable framework for exchange rate movements in Central and Eastern European countries. We apply the methodology for non-stationary panels, which allows for cross-sectional dependence. We also choose the timespan of data free of high inflation periods and focus on countries with relatively flexible exchange rates. Using quarterly panel data, 2001:4–2012:4, we find evidence of cointegration between exchange rates and macroeconomic fundamentals. Granger causality tests reveal that exchange rates have reverted to the long-run relation implied by the monetary model. The results obtained are not driven by the recent crisis.