Exchange Rate Regimes in Central, Eastern, and Southeastern Europe: A Euro Bloc and a Dollar Bloc?

Abstract

There are 13 countries in Central, Eastern, and Southeastern Europe (CESEE) with floating exchange rate regimes, de jure. This paper uses the framework pioneered by Frankel and Wei (1994) and extended in Frankel and Wei (2008) to show that most of them have been tracking either the euro or the US dollar in recent years. Eight countries, all of them current or aspiring EU members, track the euro. Of the five countries keying on the US dollar in various degrees, all but one belong to the Commonwealth of Independent States. The study shows that the extent to which each country’s currency tracks the euro (or the dollar) is correlated with the structure of its external trade and finance. However, some countries appear to track the euro or US dollar to an extent that appears inconsistent with inflation targeting, trade or financial integration, or the extent of business cycle synchronization. The phenomenon is particularly pronounced among the euro bloc countries in Emerging Europe, which may be deliberately gravitating around the euro in anticipation of eventually joining the euro area.