•Fragmentation was present at the height of the European sovereign debt crisis.•ECB's intervention in 2012 partially restored interconnectedness across member states.•Core countries remain ideal ...candidates for an optimal currency area, adding fuel to the financial fragility hypothesis.•Further integration is necessary to alleviate convergence inconsistencies across EMU member states.
This study employs dynamic connectedness as a measure of financial risk synchronization considering government bond yields in 11 EMU member states. In particular, large values of the relevant index can be an indication of comparable levels of risk further implying that the common currency area consists of a financially sensible set of countries. By contrast, small connectedness values can be an indication of fragmentation whereupon certain countries are considered to be safer than others. The latter would be detrimental for the EMU as it fuels financial fragility, which practically stipulates that crises occur as a result of self-fulfilling market fears. The results are based on a daily dataset which spans between 1st September 2003 and 31st August 2018. Findings show that fragmentation was present at the height of the European sovereign debt crisis and that the interconnectedness has not yet reverted to its pre-2009 levels. In addition, core countries appear to transmit shocks to periphery countries although, occasionally, there are noteworthy disparities. Further investigating these disparities on a pairwise connectedness level – which helps to identify sensible pairs of countries in terms of financial risk – shows that core countries dominate this exercise, with the exception of the bilateral relation between Italy and Spain. The fact that most periphery countries of our sample are not included in these pairs raises concerns and calls for a more substantial integration.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPCLJ, UPUK, ZAGLJ, ZRSKP
The purpose of this article is to identify the benefits, costs, and risks of Bulgaria’s accession to the Exchange Rate Mechanism II and the European Banking Union. A descriptive approach is applied. ...The main findings are that there are costs and risks that are not thoroughly discussed or are underestimated implying that the net impact on Bulgaria’s economy is not definitely positive. Identifying the effects of ERM II and European Banking Union participation is a specific task determined by the procedure for euro area accession applied especially for Bulgaria and Croatia. Onthe other hand, Bulgaria has been operating a currency board arrangement for the whole period of existence of the euro with a fixed exchange rate of the lev. A descriptive and comparative analysis is made where effects are qualitatively rather than quantitatively assessed. Three degrees of probability are assigned to risks which are author’s judgement based on the publicly available information
Currency participation in ERM II is conditional on the introduction of the fixed exchange rate regime. A fixed exchange rate is more at risk from a currency crisis than a flexible exchange rate. ...These concerns are also expressed in the official strategy for the introduction of euro in the Czech Republic. The goal of this paper is to evaluate the risk of a currency crisis using two methodological approaches. First, from the empirical perspective. In the history of ERM II, no currency has been affected by such currency crisis. Second, from the theoretical perspective. A currency crisis in ERM II can be explained by second-generation models that do not take into account for the fundamental causes of investor distrust and emphasize the importance of devaluation expectations. We have defined five specific risks associated with entry into ERM II which could be the cause of devaluation expectations. We have also explained three reasons why the central bank will try to maintain a fixed exchange rate in ERM II. This will weaken devaluation expectations. These specific risks, leading to devaluation expectations, and these reasons for weakening devaluation expectations, are applied to the second-generation model (we have modified this model according to ERM II conditions). We have concluded that concerns over a currency crisis from participation in ERM II are unfounded.
In this article I want to elaborate a case study on for estimating the equilibrium exchange rate in the context of Romania’s accession to the Eurozone. This paper reveals an econometric model between ...real exchange rate and its determining factors based on the methodology BEER. I started this study because currently the challenge for Romania is joining ERM II and hence the Economic and Monetary Union. Given the exchange rate volatility and the implications it may have on the Romanian economy, it is important to determine whether or not there were internal devaluations.
This paper investigates the real-time effects of sterilized foreign exchange intervention using official intraday intervention data provided by the Danish central bank. Our analysis employs a ...two-step weighted least squares estimation procedure. We control for macro surprises, address the issue of endogeneity, and carry out an array of robustness tests. Only when the direction of intervention is consistent with the monetary policy stance do we find that intervention exerts a significant influence on exchange rate returns.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
Based on intraday high-frequency data, this paper investigates the effect of sterilized interventions on the Slovak koruna/euro exchange rate for different time windows during a period that coincides ...with Slovakia’s preparation for EU accession and euro adoption. Results confirm a significant relationship between intervention and exchange rate change. The maximum effect of intervention is reflected in the exchange rate change within a couple of hours, and the effect over longer time windows weakens only gradually. The initial impact of sale interventions is stronger than that of purchase interventions.
This paper analyses some of the economic issues related to Romania's ability to meet the Maastricht exchange rate criterion. Based on the experience of the countries which had already joined Euro ...zone, we identified that, beyond the standard fluctuation band of ± 15% officially required by ERMII, there is a strong preference for maintaining the exchange rate within a narrow band, with an upper margin of maximum +10 percent over the central rate. On this background, a hypothetical participation of Romanian leu in ERM-II over two-year period is assessed using the framework developed by the European Central Bank and the European Commission. Simulations performed on daily data series for the last 24 months indicate that the nominal exchange rate of RON was relatively stable within the standard fluctuation band. Nevertheless, it significantly deviated from the pattern exhibited by the currencies that had fulfilled this criterion. Downwards pressures that characterized the developments of Romanian leu as well as the spikes in volatility of the exchange rate could signal an intensity of tensions inconsistent with the above mentioned criterion.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPCLJ, UPUK, ZAGLJ, ZRSKP
Participation in the exchange rate mechanism ERM II (one of the Maastricht criteria – exchange rate stability) is compatible with certain exchange rate regimes only. The aim of this paper is to find ...arguments for choosing one of these regimes. The starting point is the current strategy of the euro introduction in the Czech Republic, and the expressed concerns about the risks associated with fixing of the exchange rate. The used method is analysis of data on the currency participation in ERM II and searching for analogies of Czech koruna. The analysis consists of the identification of exchange rate regimes used before and after ERM II so that to determine the duration of ERM II involvement. Fixing of the exchange rate in the regime peg with a band of oscillation of 15% in both directions is the working hypothesis. Criteria of the so-called normal fluctuations margins and the so-called severe tension are also discussed. Development trend of the CZK/EUR exchange rate is examined. The outcome of the research is finding the risks associated with this exchange rate regime. It is the risk of a narrow fluctuation band (2.25%) in depreciation direction and the risk in the form of foreign exchange intervention or interest rate differential at excessive appreciation of the exchange rate.
We investigate the intraday effects of intra-marginal intervention in a horizontal band on the exchange rate spread. Official intraday data on Danish intervention transactions in the ERM II, the ...Exchange Rate Mechanism of the European Union, facilitates our analysis. We show that intervention purchases and sales both exert a significant influence on the exchange rate spread, but in opposite directions. Intervention purchases of the small currency, on average, narrow the spread while intervention sales of the small currency, on average, widen the spread. This is a novel finding that differs from those of existing studies that find intervention always widens the exchange rate spread and increases market uncertainty.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
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