The Drivers of the CEE Exchange Rate Volatility - Empirical Perspective in the context of the Recent Financial Crisis

by Morar Triandafil, Cristina and Brezeanu, Petre and  Huidumac, Catalin and Morar Triandafil, Adrian
Published in Romanian Journal of Economic Forecasting
, 2011, volume 14 issue 1, 212-229

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This paper focuses on the CEE countries volatility captured by the exchange rate dynamics. In the first part, the spillover phenomenon is analyzed from the perspective of the recent financial crisis, where cross-border capital flows increased the risk of financial contagion. Volatility will be approached bi-dimensionally, from the perspective of the permanent and transitory dimensions. We conclude that volatility is of long-term nature in the CEE countries, with a certain degree of pecularity in terms of shock reaction.
In the second part, a research on the key determinants of the exchange rate volatility is conducted. Variables originating in financial markets were selected EMBI spreads, Central Bank interest rate as well as macroeconomic fundamentals inflation, CROI index - in order to identify factors by which volatility pattern can be depicted.
The key result of the research points toward a deep correlation of the exchange rate volatility between the CEE countries and the Euro Zone, implying the necessity to develop strong financial management strategies at the macroeconomic level, capable of annihilating the transmission belt crisis mechanisms.

Keywords: volatility, component, transitory, permanent, spillover
JEL Classification:
G1, G00