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Structural Challenges for Europe

Edited by Gertrude Tumpel-Gugerell and Peter Mooslechner

The main thrust of the book is that the sharing of mutual experiences is important for generating an acceptable policy mix, both at EU and national levels. The contributors highlight key financial issues, including the role of FDI and of foreign banks in the still ‘under-banked’ acceding countries, the re-launch of social security systems and the fiscal challenges of financing the catch-up process. They also examine the ongoing EU debate surrounding the application of the Stability and Growth Pact in Central and Eastern European Countries (CEECs) and go on to explore the contrasting evidence that some CEECs have shown more extensive privatisation efforts than some EU countries.
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Chapter 25: Exchange rates and long-term interest rates in Central Europe – how do monetary and fiscal policies affect them?

Franz Schardax


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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