Some Exchange Rates Are More Stable than Others: Short-Run Evidence from Transition Countries

Abstract

The paper investigates empirically the endogenous liquidity nexus of exchange rate determination on a sample of four transition economies. We find evidence in favor of the hypothesis of a nonlinear error correction process vis-a-vis longer-term trend deviations. The results suggest that early and successful exchange-rate market and financial-account liberalization pays off in terms of depth of the market and, hence, faster adjustment of national currencies to short-term shocks to the exchange rate.Exchange rate, endogenous liquidity, error-correction mechanism, nonlinearity.