# How Well Do Contemporary Theories Explain Floating Exchange Rate Changes in an Emerging Economy: The Case of EUR/PLN

## Abstract

**:**

## 1. Introduction

## 2. Methodology

#### 2.1. Vector Error Correction Model

- ${Y}_{t}=\left({y}_{1t},\dots ,{y}_{Kt}\right)$ is the vector of K endogenous variables,
- ${X}_{t}=({x}_{1t},\dots ,{x}_{Mt}$ is the vector of K exogenous variables,
- ${D}_{t}^{co}$ includes all deterministic terms in the cointegrated relations,
- ${D}_{t}$ contains all the remaining deterministic terms (outside the cointegrating relation).

#### 2.2. Structural Analysis—Impulse Response Function and Forecast Variance Error Decomposition

- ${\Phi}_{i}={{\displaystyle \sum}}_{j=1}^{s}{\varphi}_{s-j}{A}_{j}$ for $s=1,\text{}2,\dots ,$
- with ${\varphi}_{0}={I}_{K}$ and ${A}_{j}=0$ for $j>p$.

## 3. Results

#### 3.1. Data Description

- ${i}_{y,t}$—yearly interest rate,
- ${i}_{m,t}$—monthly interest rate.

- EMP—denotes the total employment in the sector,
- GVA—refers to the Gross Value Added in the Sector,
- MA—manufacturing sector,
- NMA—aggregate of other sectors than manufacturing,
- pl—Poland,
- ea—Euro Area.

- -
- Nominal exchange rate—EUR/PLN (source: National Bank of Poland)
- -
- “tradable sector” price index for Poland—PPI in manufacturing (source: OECD)
- -
- “tradable sector” price index for the foreign economy (Euro Area)—PPI in manufacturing (source: OECD)
- -
- Consumer price index for Poland—HICP (source: Eurostat)
- -
- Consumer price index for the foreign economy (Euro Area)—HICP (source: Eurostat)
- -
- Short-term domestic interest rate—3-month WIBOR rate (source: OECD)
- -
- Short-term foreign interest rate—3-month EURIBOR rate (source: OECD)
- -
- Long-term domestic interest rate—10-year Polish government bond (source: OECD)
- -
- Long-term foreign interest rate—average 10-year government bond interest rate in EA19 countries (source: OECD),
- -
- Global risk premium indicator—CBOE volatility index (VIX)
- -
- Variable representing the HBS effect indicator (source: personal calculations based on Eurostat)
- -
- Relative terms of trade indicator—based on Eurostat prices for exports and imports for Poland and EA19 (source: Eurostat)
- -
- Net direct investment (liabilities asset) in relation to GDP (source: personal calculations based on the National Bank of Poland and Eurostat)
- -
- Other liabilities’ (net international investment position—net direct investment) relation to GDP (source: personal calculations based on the National Bank of Poland and Eurostat)

#### 3.2. Empirical Strategy

#### 3.3. Initial Analysis and Hypothesis

#### 3.4. Model Selection

#### 3.5. Parameter Estimates

#### 3.6. IRF Analysis

#### 3.7. Main Sources of Exchange Rate Variability—FEVD Analysis

## 4. Discussion

## Supplementary Materials

^{2}for equation for log changes of logarithm for real exchange rate.

## Funding

## Informed Consent Statement

## Data Availability Statement

## Conflicts of Interest

## Notes

1 | Turnover of over the counter (OTC) foreign exchange instruments, by currency, Net basis, April 1989–2019 daily average, according to the Triennal Central Bank Survey. |

2 | Between 2000 and 2015 cumulative real appreciation was only 3.9% (0.2% annually). |

3 | However, in Keppel and Prettner (2015) estimation sample includes earlier years than this research (1995–2009) and exchange rate is just average exchange rate index for 5 Central and Eastern European countries: Poland, Czech Republic, Hungary, Slovenia, Slovakia. |

4 | However, in Grabowski and Stawarz-Grabowska (2021) paper more-recent and entirely post-GFC sample is used (2010–2019) and results regarding conventional instruments of ECBs monetary policy are found surprising. |

5 | Impact of non-conventional ECB instruments (measured by ECB balance sheet) had been investigated in Kębłowski et al. (2020) who found increase of ECB balance sheet shock causes decline of EUR/PLN. However statistical significance of this impact had been not examined. |

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**Figure 1.**Monthly average EUR/PLN exchange rate (LER) and Polish and EA PPI indexes in manufacturing (LP and LPEZ, respectively) between 1 m in 1999 and 12 m in 2015 expressed in logs (see details in Section 3.1).

**Figure 2.**Monthly average EUR/PLN exchange rate (LER) and Polish and EA HCPI indexes (lCPI_PL and ICPI_EA, respectively) between 1 m in 1999 and 12 m in 2015 expressed in logs (see details in Section 3.1).

**Figure 3.**Monthly average EUR/PLN exchange rate (LER) expressed in logs and 3 months WIBOR (I3 M) and EURIBOR interest rates (I3 MEZ) expressed in monthly interest rates between 1 m in 1999 and 12 m in 2015 (see details in Section 3.1).

**Figure 4.**Monthly average EUR/PLN exchange rate (LER) expressed in logs and 10-year Polish government bonds (I10Y) and weighted average EA government bond yields (I10 YEZ) expressed in monthly interest rates between 1 m 1999 and 12 m in 2015 (see details in Section 3.1).

**Figure 5.**Monthly average EUR/PLN exchange rate (LER) expressed in natural logs and VIX index between 1 m in 1999 and 12 m in 2015 (see details in Section 3.1).

**Figure 6.**Monthly average real PLN/EUR exchange rate (HICP deflated) and terms of trade indicator (lTOT) expressed in natural logs between 1 m in 1999 and 12 m in 2015 (see details in Section 3.1).

**Figure 7.**Terms of Trade and relative productivity (HBS indicator)—deviations from long-term linear trends between 1 m in 1999 and 12 m in 2015.

**Figure 8.**Terms of Trade—deviations from long-term trend and real PLN/EUR deflated by PPI in manufacturing expressed in logs—between 1 m in 1999 and 12 m in 2015 (see details in Section 3.1).

**Figure 9.**Monthly average EUR/PLN exchange rate (LER) and net direct investments on GDP (lNet_FDI_GDP) and other net foreign liabilities in GDP (lNeNon_FDI_GDP) expressed in logs between 1 m in 1999 and 12 m in 2015 (see details in Section 3.1).

**Figure 10.**Other net foreign liabilities with regard to GDP (OFL)—deviation from the trend and real PLN/EUR deflated by PPI in manufacturing expressed in logs between 1 m in 1999 and 12 m in 2015.

Period (Annual Data) | CAGR (%) | ||||
---|---|---|---|---|---|

$\frac{GV{A}_{MA,pl,t}}{EM{P}_{MA,pl,t}}$ | $\frac{GV{A}_{NMA,pl,t}}{EM{P}_{NMA,pl,t}}$ | $\frac{GV{A}_{MA,ea,t}}{EM{P}_{MA,ea,t}}$ | $\frac{GV{A}_{NMA,ea,t}}{EM{P}_{NMA,ea,t}}$ | HBS indicator | |

2000–2015 | 6.6% | 2.2% | 2.0% | 0.4% | 2.6% |

2000–2008 | 7.3% | 2.3% | 2.5% | 0.5% | 2.8% |

2008–2015 | 5.8% | 2.0% | 1.5% | 0.2% | 2.4% |

2008–2009 | 6.2% | 1.6% | −9.4% | −1.2% | 14.0% |

2009–2015 | 5.7% | 2.1% | 3.4% | 0.4% | 0.6% |

Preferred Cointegration Rank | ||||||
---|---|---|---|---|---|---|

Sample till 6 m 2008 | Sample till 6 m 2011 | Sample till 12 m 2015 | ||||

Model | Lags2 | Lags3 | Lags2 | Lags3 | Lags2 | Lags3 |

PPP | 1 | 1 | 1 | |||

CHEER | 1 | 1 | 1 | 1 | 1 | |

CHEER_RP | 3 | 1 | 2 | |||

CHEER_HBS_RP | 2 | 2 | 3 | 2 | 3 | 2 |

CHEER_BEER | 3 | 1 | 4 | 4 | 4 | 3 |

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**MDPI and ACS Style**

Burda, A.M.
How Well Do Contemporary Theories Explain Floating Exchange Rate Changes in an Emerging Economy: The Case of EUR/PLN. *Economies* **2022**, *10*, 282.
https://doi.org/10.3390/economies10110282

**AMA Style**

Burda AM.
How Well Do Contemporary Theories Explain Floating Exchange Rate Changes in an Emerging Economy: The Case of EUR/PLN. *Economies*. 2022; 10(11):282.
https://doi.org/10.3390/economies10110282

**Chicago/Turabian Style**

Burda, Adrian Marek.
2022. "How Well Do Contemporary Theories Explain Floating Exchange Rate Changes in an Emerging Economy: The Case of EUR/PLN" *Economies* 10, no. 11: 282.
https://doi.org/10.3390/economies10110282