Strategies to Achieve Foreign Exchange Stability Nearby the Eurozone

Abstract

Using a panel vector error correction (VAR) model, we assess foreign exchange rate stability in the Central-East European and Balkan countries. Literature defines foreign exchange stability within the Mundell-Fleming dilemma. We show that currency stability is not only reinforced by the monetary policy but also by inflation, workers’ remittances and IMF support programs. We also find evidence that the balance sheet structure difference has similar impact like the conventional uncovered interest parity (UIP). Thus, this paper makes a new contribution to the debate of central bank instruments’ indirect impact on exchange rate stability, while highlighting the fragility of open and small economies.