The European periphery during the crisis: fix or float?

Abstract

This article empirically investigates the growth performance of European noneuro area countries during the recent global crisis depending on their respective exchange rate regime. Usually, floating exchange rate regimes are considered to better help countries cope with negative real shocks. However, for countries with close ties to the euro area, the advantages of pegging their exchange rate to the euro might dominate even during such a crisis. By applying standard panel growth regressions, the empirical analysis shows that during the crisis, countries with a floating exchange rate (i.e. those that should be better able to react to a crisis) did indeed grow more successfully.

Keywords:

• EU
• EMU
• exchange rates
• growth
• economic integration
• international monetary arrangements

JEL Classification:

• F33
• F36
• O4

Acknowledgements

The author would like to thank Joscha Beckmann and Dirk Veestraeten for valuable comments and suggestions.

Notes

¹ Cf. the theory of optimum currency areas which was pioneered by Mundell (1961) and later expanded (Tavlas, 1993 gives an overview).

² Cf. Reinhart and Rogoff (2004) or Levy-Yeyati and Sturzenegger (2005) for differences between de facto and de jure ERRs.

³ Reliable data for many Eastern European countries are available only since the mid-1990s. Quarterly data are not available for every variable in the data set.

⁴ Countries classified as ‘fixed’ in the sample without changing their ERR during the observed time period are Bosnia and Herzegovina, Bulgaria, Denmark, Latvia and Lithuania.

⁵ Dynamic models such as the GMM estimator are usually consistent for large N and do not behave well in finite samples as the one at hand.