Interest Rate Transmission and Exchange Rate Arrangements in the Central and Eastern European Countries: Evidence from the Current International Financial Crises

Abstract

In this study we analyze which are the consequences of the euro interest rate movements over the interest rates in 16 CEE selected countries’ money markets outside euro zone during the current international financial crises period, in a framework of different exchange rate regimes. We adopted in our approach a methodology derived from the one used by Frankel et al. (2004). We found that the sample countries do not develop an independent monetary policy in relation with ECB on the long run, but the results seem to confirm that there are differences on groups of countries (EU and non EU member) and due to heterogeneity of their exchange rate arrangements. Also, there are significant differences between the official declared exchange rate regimes and the real behavior of the monetary authority, especially those with pure floating exchange rate regimes. This could be a lesson for international banks with great exposure on CEE markets. The sensitivity of domestic interest rates of CEE countries to euro interest rates demonstrates a possible regional vulnerability.