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.
Issued: July 2003
Keywords: Exchange rate, endogenous liquidity, error-correction mechanism, nonlinearity
Revised version:
- " Liberalized Markets Have More Stable Exchange Rates: Short-Run Evidence from Four Transition Countries', IMF Series: Working Paper No. 04/35, February 1, 2004
- " Liberalized Markets Have More Stable Exchange Rates: Short-Run Evidence from Four Transition Countries ,' Czech Journal of Finance and Economics No.5, 2005
Download CNB WP No 5/2003 (pdf, 675 kB)