چه عواملی باعث نوسانات نرخ ارز می شود؟ مدارک از اعضای EMU انتخاب شده و داوطلبان از کشورهای عضو EMU گزینش شده اند

We allow for monetary, real, and financial variables to assess the relevant importance of each of the variables to exchange rate volatility in the case of selected EMU members and candidate countries. Ex-ante analysis shows that volatility in the Polish zloty/euro and the Hungarian forint/euro forex markets can be influenced by the monetary-side of the economy. On the other hand, ex-post analysis shows that forex markets in France, Italy and Spain had been influenced, during the pre-EMU era, by monetary and real shocks. However, the Irish pound exchange rate per ECU had been affected by only real shocks.

In theoretical and empirical literature the impact of exchange rate volatility on the economy is a matter of a current debate. From one point of view, theoretical papers, such that of Obstfeld and Rogoff (1998), argue that exchange rate volatility is costly to the domestic economy. They illustrate that households and firms are negatively influenced through direct and indirect channels. The direct channel is based on the assumption that people are not happy with exchange rate fluctuations because they generate fluctuations in their consumption and leisure. The indirect channel assumes that firms set higher prices, in the form of a risk premium, in their attempt to hedge the risks of future exchange rate fluctuations. On the other hand, a different set of models, including that of Devereux and Engel (2003), supports the view that exchange rate volatility does not entail welfare costs. They show that domestic consumption is not affected if prices are fixed to the currency of the foreign country. However, empirically it is more common that exchange rate volatility provokes costs for the domestic economy. In general, welfare costs are higher for developing countries than for developed countries. Egert and Morales-Zumaquero (2005) find that exchange rate volatility weakens exports in Central and Eastern European (CEE) countries with different effects across countries. An active application of the argument that exchange rate volatility is costly is the European Economic and Monetary Union (EMU). Exchange rate stability is crucial for the effectiveness of monetary convergence to the euro zone. In other words, in line with the theory of optimum currency areas, the lower the exchange rate volatility, the greater the ability of two countries to share a common currency. Hence, the Maastricht Treaty has set the obligation of EMU candidate countries to retain exchange rate stability vis-à-vis the euro for at least two years before adopting the single currency. The empirical literature on the direct examination of exchange rate volatility in EMU candidate countries is not rich. Bask and Luna (2005) found that with the creation of EMU, most of the European countries have been more stable and less volatile. However, specific facts can change the behavior of exchange rates. For instance, most of the currencies became more volatile when Denmark voted against the euro. Finally, they did not find evidence that monetary policy integration can negatively affect exchange rate stability. A study that is more relevant – to EMU candidate countries – is that of Kocenda and Valachy (2006), which examines the behavior of exchange rate volatility for Poland, Hungary, Slovakia, and Czech Republic under fixed and floating exchange rate regimes. Applying a Threshold GARCH (TGARCH) model in order to capture any asymmetric effects in the process, they find that volatility is greater under a floating than under a fixed regime. This implies that the type of the regime is an important factor for exchange rate volatility.1 However, exchange rate volatility patterns are different across countries. In addition, they find that the effect of the interest rate differential on volatility is small, but it becomes higher under floating regimes. This is because under a fixed regime monetary policy is not independent and domestic interest rates are set by the foreign “anchor” country. Kobor and Szekely (2004) find that exchange rate volatility (vis-à-vis the euro) in four CEE countries is subject to regime switching. Cross-correlations between exchange rates are higher when both exchange rates are in the high volatility regime, which implies higher spillover effects when exchange rates are volatile. In general, they find that high volatility is linked with depreciation periods, while low volatility comes with slow appreciation trends (for the domestic currency). In the present study, consistent with the Maastricht exchange rate criterion, we examine the behavior of four CEE countries’ currencies vis-à-vis the euro. To be specific, we aim to define the sources of volatility of those exchange rates. We allow for monetary variables, real variables, and financial variables to assess the relevant importance of each of the variables to (potential) exchange rate volatility. In addition, we conduct the same analysis for selected EMU and former European Monetary System (EMS) members in order to examine the dynamic relationship among the corresponding exchange rates vis-à-vis the ECU and the above variables of interest during the pre-EMU period. Namely, the empirical investigation involves an ex-ante analysis for the cluster of CEE countries and an ex-post analysis for the cluster of EMU countries. This paper contributes by shedding light on a number of important policy issues. First, the ex-ante analysis provides important information to the monetary authorities about which part of the economy induces most exchange rate volatility. Thanks to this information, policy makers in CEE countries are aware of the channels which transmit volatility to the exchange rate and by applying the appropriate policy can stabilize those disturbances in order to avoid excessive fluctuation of their exchange rates per euro (for those countries which follow a free-floating or managed-floating regime) and excessive pressure on the currency (for those countries which have chosen to peg the exchange rate at the fixed central rate). Second, we can infer whether monetary-based or real-based shocks are most important in explaining exchange rate behavior. This information is helpful in evaluating the applied exchange rate policy against the euro until the time of adoption of the single currency. If monetary shocks are more important then a fixed regime is appropriate. In contrast, if real shocks drive exchange rate developments then a floating exchange rate regime seems to be appropriate. Third, our results indicate how a potential entry of the CEE countries in the EMU can affect the euro zone itself. We investigate whether exchange rate volatility across countries has a common source which can be treated by a common monetary policy (i.e. ECB’s monetary policy). Finally, the ex-post analysis informs us whether the source of exchange rate volatility can be accused, inter alia, for the EMS crisis.

In this paper we attempt to identify the dynamic relations among the foreign exchange market and the monetary and real sides of the economy as well as the domestic financial sector for the case of four CEE countries and four EMU countries (former EMS members). Preliminary analysis has presented evidence of causal relationships among the variables of interest in most of the examined countries. The most frequently observed relationship is this between the exchange rate and the interest rate differential. Similarly, our main empirical analysis, which is based on the bivariate specification of the CCC-MGARCH (1,1) and TVCC-MGARCH (1,1) models, entails that the presence of active volatility transmission channels between the forex market and the other sectors of the economy ranges from country to country.11 For the cluster of CEE countries, multivariate GARCH analysis has shown that volatility in the Polish zloty/euro forex market can be influenced by the interest rate differential and the Polish stock market. This finding implies that the sources of exchange rate volatility for this market come from the monetary-side of the economy and the financial sector. Similarly, the Hungarian forint/euro forex market can import volatility from the interest rate differential, implying that exchange rate volatility is driven by the monetary-side of the economy as well. In contrast, there is no evidence of short-run dynamic relations between the exchange rate and the rest of the variables for the Czech Republic and Slovakia. This means that any shocks in the real-side or the monetary-side of the economy as well as in the financial sector do not transmit volatility to the foreign exchange market. In line with the variance decomposition analysis, this finding shows that exchange rate return variance is driven by its own innovations.12 A key question is why exchange rate volatility in the Czech Republic and Slovakia is not influenced by other markets’ developments. The answer is given by examining the monetary policy and the exchange rate policy vis-à-vis the euro. Both countries apply an inflation targeting regime in which monetary authorities adjust interest rates in a way consistent with exchange rate stability and the convergence criteria. The ECB convergence report (2008) argues that long-term interest rate differentials vis-à-vis the euro area are relatively small in the Czech Republic and Slovakia. Most important is the role of the exchange rate policy. The Czech koruna was pegged to a basket of currencies until early 1996. In 1997 the Czech Republic abandoned the fixed peg exchange rate regime and since then, the Czech koruna has been determined under a managed-floating exchange rate regime. This means that although the koruna can fluctuate with respect to the euro, the Central Bank retains the right of intervention in the forex market to smooth excessive fluctuations. Similarly, Slovakia has applied a managed-floating regime since October 1998. At this time, Slovakia abandoned the fixed exchange rate regime with a narrow fluctuation band (±0.5% to ±7%) due to the increased pressures on the fixed rate as a result of the Russian currency crisis. On the other hand, the adoption of a free-floating exchange rate regime in relation with high long-term interest rate differentials (ECB, 2008) can explain the vulnerability of the Polish zloty/euro exchange rate to monetary and financial shocks. Since 2000 the zloty has been determined freely vis-à-vis the euro, indicating high volatility. During the period 1991–2001, the Hungarian forint was determined under a crawling peg exchange rate regime. Since September 2001, this regime has been replaced by a fixed central parity against the euro (282.36 forint per euro), while the fluctuation band has been extended from ±2.5% to ±15%. However, domestic economic imbalances that are reflected in high long-term interest rate differentials against euro rates (ECB, 2008) can explain the relatively high volatility of the forint exchange rate against the euro as well as its vulnerability to monetary shocks. As for the cluster of EMU countries, the results reveal bi-directional volatility spillover effects between the exchange rate and the interest rate differential for the cases of France and Italy. Although this finding implies that exchange rate volatility had been influenced by the monetary-side of the economy, the truth is that forex market developments had caused higher influence to interest rates. In addition, it is found that exchange rate variance had been affected by the variance of the IP differential. Hence, we have found that exchange rate volatility, for France and Italy during the pre-EMU period, came from the monetary-side as well as the real-side of the economy. For the case of Spain, we have found the existence of volatility transmission channels from the interest rate differential to the exchange rate and from the exchange rate to the stock market. Moreover, there is evidence of reciprocal volatility spillover effects between the exchange rate and the IP differential. These results describe the argument that forex market developments in Spain had been influenced by monetary and real factors. Finally, the results from the Irish case reveal that exchange rate volatility had been driven only by the real-side of the economy. Moving on to policy implications, this empirical analysis informs policy makers in CEE countries that monetary instability provokes exchange rate volatility. So, by stabilizing the monetary-side of the economy, monetary authorities can reduce the degree of exchange rate exposure to excess volatility. Furthermore, the evidence that monetary shocks are more important than real shocks in affecting exchange rate volatility sheds light on the effectiveness of the applied exchange rate policy vis-à-vis the euro. According to theory, if monetary shocks are more important, a fixed regime is appropriate. In contrast, if real shocks drive the exchange rate developments then a free-floating exchange rate regime seems to be appropriate. Therefore, the adoption of a managed-floating regime with a relatively narrow fluctuation band, as adopted by the majority of the CEE countries, is consistent with the information derived from this analysis. Moreover, the results indicate that the exchange rates in CEE countries, which have been found to be influenced by other market developments, have the same source of volatility (i.e. monetary shocks). This means that a common monetary policy could treat exchange rate volatility, thereby showing that the foregoing participation of those countries in EMU is not expected to produce asymmetric shocks in the monetary-side of the euro area.13 On the contrary, exchange rates vis-à-vis the ECU were driven by monetary and real shocks for France, Italy and Spain and only by real shocks for the case of Ireland. The fact that real shocks are important determinants of exchange rate fluctuation, during the pre-EMU period, implies that the fixed exchange rate regime, under the framework of the Exchange Rate Mechanism (ERM) I, was not the appropriate. Since most of the examined period (1980–1998) covers the EMS era (1979–1993), we can state that this finding could be one of the reasons of the EMS crisis. Namely, our results show that EU was not ready for a monetary union, at least in the form of the EMS, since the fixed exchange rate regime was not consistent with the macroeconomic developments in EU members.14