Exchange Rate Variability, Pressures and Optimum Currency Area Criteria: Lessons for the Central and Eastern European Countries

This paper estimates the medium-term determinants of the bilateral exchange rate variability and exchange rate pressures for 20 developed countries in the 1990s. The results suggest that the optimum currency area criteria explain the dynamics of bilateral exchange rate variability and pressures to a large extent. Next, we predict exchange rate volatility and pressures for the Central and Eastern European Countries (CEECs). We find that the CEECs encounter exchange rate pressures at approximately the same level as the euro area countries did before they adopted the euro.