Chapter 25: Exchange rates and long-term interest rates in Central Europe – how do monetary and fiscal policies affect them?
25. Exchange rates and long-term interest rates in Central Europe – how do monetary and ﬁscal policies aﬀect them?1 Franz Schardax2 1. INTRODUCTION Against the background of the future integration of Central and Eastern European accession countries into the euro area (which includes membership in ERM II), the issue of the consistency of monetary and ﬁscal policies in an environment of increasingly liberalized capital ﬂows will play an ever more important role. However, in order to pursue such consistent policies, macroeconomic policy makers require information about the likely impact of their actions on ﬁnancial as well as real variables. By analysing the impact of monetary and ﬁscal policy impulses in the Czech Republic, Hungary and Poland under ﬂoating exchange rate regimes as well as under crawling peg/band regimes, this chapter attempts to provide such information. After a review of empirical investigations of monetary and ﬁscal policies which apply vector autoregression (VAR) techniques in section 2, section 3 provides an overview of the macroeconomic framework in the three Central European accession countries (CEEC-3) covered by this study. In section 4, three country-speciﬁc unrestricted VAR models are estimated and used to examine the impact of central government budget balances and money market interest rate diﬀerences between CEECs and a reference country/currency basket on exchange rates (gross oﬃcial reserves for the exchange rate peg case) and yield diﬀerences for ﬁve-year bonds. For the Czech Republic and Poland, the most recent monthly data since the introduction of the direct...
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