Exchange Rate Volatility and Regime Change:Visegrad Comparison

Abstract

We analyze exchange rate volatility in the Visegrad Four countries in the course of their abandoning tight regimes for more flexible ones. We account for path dependence, asymmetric shocks, movements in interest rates, and allow for generalized error distribution. The overall findings are that volatility path dependence has a limited effect on exchange rate developments and introduction of floating regimes tends to increase exchange rate volatility. During the period of flexible regimes volatility was to a large extent driven by surprises. Degree of persistence in exchange rate volatility is high, differs with respect to currency, but stays at a similar level under the floating regime. Asymmetric news effect tends to decrease volatility under the float. Interest differential contemporaneously impacts exchange rate volatility under either regime, while the interest differential intertemporal effect is not found. Accordingly we draw policy implications.