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Article

Exchange Rate Volatility, Currency Misalignment, and Risk of Recession in the Central and Eastern European Countries

1
Council of Social Sciences, Cracow University of Technology, 31155 Cracow, Poland
2
Department of International Economic Relations, Lviv National University Named by Ivan Franko, 79000 Lviv, Ukraine
*
Author to whom correspondence should be addressed.
Academic Editor: Józef Dziechciarz
Received: 30 March 2021 / Revised: 17 April 2021 / Accepted: 20 April 2021 / Published: 1 May 2021
(This article belongs to the Special Issue Data Analysis for Risk Management – Economics, Finance and Business)
This study is aimed at estimation of the exchange rate volatility and its impact on the business cycle fluctuations in four central and eastern European countries (the Czech Republic, Hungary, Poland, and Romania). Exchange rate volatility is estimated with the EGARCH(1,1) model. It is found that exchange rate volatility is affected by the components of the Index of Economic Freedom from the Heritage Foundation, besides inflation and crisis developments. The empirical results using GMM estimation technique and comprehensive robustness checks suggest that exchange rate volatility reduces the risk of recession in the Czech Republic while the opposite effect is found for Hungary and Romania, with a neutrality for Poland. These findings continue to hold after controlling for the fiscal and monetary policy indicators. There is evidence that the RER undervaluation prevents sliding into a recession on a credible basis in Poland only, with a neutral stance for other countries. Except in Romania, higher levels of economic freedom is associated with worsening of the cyclical position of output. Among other results, stabilization policies in the recession imply fiscal tightening for the Czech Republic and Romania, higher money supply for the Czech Republic and Poland, and lower central bank reference rate for Hungary. View Full-Text
Keywords: exchange rate volatility; currency misalignment; business cycle; central and eastern European countries exchange rate volatility; currency misalignment; business cycle; central and eastern European countries
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MDPI and ACS Style

Shevchuk, V.; Kopych, R. Exchange Rate Volatility, Currency Misalignment, and Risk of Recession in the Central and Eastern European Countries. Risks 2021, 9, 82. https://0-doi-org.brum.beds.ac.uk/10.3390/risks9050082

AMA Style

Shevchuk V, Kopych R. Exchange Rate Volatility, Currency Misalignment, and Risk of Recession in the Central and Eastern European Countries. Risks. 2021; 9(5):82. https://0-doi-org.brum.beds.ac.uk/10.3390/risks9050082

Chicago/Turabian Style

Shevchuk, Victor, and Roman Kopych. 2021. "Exchange Rate Volatility, Currency Misalignment, and Risk of Recession in the Central and Eastern European Countries" Risks 9, no. 5: 82. https://0-doi-org.brum.beds.ac.uk/10.3390/risks9050082

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