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THE EFFECT OF EXCHANGE RATE ARRANGEMENTS ON TRANSMISSION OF INTEREST RATES AND MONETARY POLICY INDEPENDENCE: EVIDENCE FROM A GROUP OF NEW EU MEMBER COUNTRIES

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Author(s): Bogdan CĂPRARU | Iulian IHNATOV

Journal: Scientific Annals of the Alexandru Ioan Cuza University of Iasi : Economic Sciences Series
ISSN 0379-7864

Volume: 2011;
Issue: LVIII;
Start page: 71;
Date: 2011;
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Keywords: exchange rate regime | monetary policy independence hypothesis | interest rate | European integration | European Central Bank

ABSTRACT
The main objective of this paper is to investigate whether empirical support for the monetary independence hypothesis can be found from eight EU new member countries. Thus, we will analyze which are the consequences of the euro interest rate movements over the interest rates in selected EU new members outside euro zone, in a framework of different exchange rate regimes. We employ 2SLS cross-section fixed-effects estimation on a panel of countries, with a Newey-West estimator, robust against heteroscedasticity and autocorrelation. We find that interest rates in non-Euro area EU members with floating exchange rate arrangements are found to react considerably more to ECB’s interest rate shocks than do interest rates in those that have fixed or intermediate exchange rate regimes. The evidence suggest that countries with floating exchange rate arrangements are less independent than the fixed and intermediate exchange rate countries and, furthermore, intermediate arrangements help to preserve better the monetary policy autonomy.
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