Exchange Rate Volatility, Currency Misalignment, and Risk of Recession in the Central and Eastern European Countries

This study is aimed at estimation of the exchange rate volatility and its impact on business cycle fluctuations in four central eastern European countries (the Czech Republic, Hungary, Poland, Romania). Exchange estimated with EGARCH(1,1) model. It found that affected by components Index Economic Freedom from Heritage Foundation, besides inflation crisis developments. The empirical results using GMM technique comprehensive robustness checks suggest reduces risk recession Republic while opposite effect for Hungary Romania, a neutrality Poland. These findings continue to hold after controlling fiscal monetary policy indicators. There evidence RER undervaluation prevents sliding into credible basis Poland only, neutral stance other countries. Except higher levels economic freedom associated worsening cyclical position output. Among results, stabilization policies imply tightening money supply lower bank reference Hungary.