Adjustment mechanisms and exchange rate regimes in 2004 new EU members during the financial crisis

Abstract

The global economic crisis confronted emerging European countries with abrupt external shocks, while adjustment mechanisms differed according to exchange rate regimes. ‘Fixers’ were forced to accept internal devaluation, while ‘floaters’ used the exchange rate as a shock absorber. Empirical research is based on six emerging European countries in January 2004–December 2010 and the January 2008–December 2010 crisis period. This article explores the real exchange rate as an adjustment mechanism variable, crisis transmission to the real economy, and foreign exchange intervention as a way of exchange rate management/defence. The relations investigated are observed using VAR models in order to distinguish between the groups of ‘floaters’ and ‘fixers’.