Exchange Rate Stability, Inflation and Growth in (South) Eastern and Central Europe

33 Pages Posted: 24 Nov 2006

See all articles by Gunther Schnabl

Gunther Schnabl

University of Leipzig - Institute for Economic Policy

Paul De Grauwe

CESifo (Center for Economic Studies and Ifo Institute for Economic Research); London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Abstract

This paper analyzes the impact of the exchange rate regime on inflation and output in (South) Eastern and Central Europe. The panel estimations for the period between 1994 and 2004 show that de facto measures of exchange rate stability have a better explanatory power than the de jure measures in the inflation and growth equations. For the whole observation period the estimations reveal a significant impact of exchange rate stability on low inflation as well as a highly significant positive impact of exchange stability on real growth. When sub-dividing the period into a "high-inflation" period (1994-1997) and a "low inflation period" (1998-2004) and when removing outliers from the sample, the evidence in favour of a positive association between exchange rate stability and inflation disappears. The association of exchange rate stability with higher real growth remains robust. These findings suggest that membership of the (South) Eastern and Central European countries in the European Monetary Union would have a positive impact on these countries' growth rates.

Keywords: Exchange Rate Regimes, Inflation, Growth, Central and Eastern Europe, Macroeconomic Stability

JEL Classification: F31

Suggested Citation

Schnabl, Gunther and De Grauwe, Paul and De Grauwe, Paul, Exchange Rate Stability, Inflation and Growth in (South) Eastern and Central Europe. Review of Development Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=946968

Gunther Schnabl (Contact Author)

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Straße 12
Leipzig, 04109
Germany

HOME PAGE: http://www.wifa.uni-leipzig.de/iwp/

Paul De Grauwe

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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