Volatility Regimes in Central and Eastern European Countries' Exchange Rates

Abstract

The author investigates changes between volatility regimes in five Central and Eastern European countries to analyze whether these changes are consistent with changes in the official exchange rate arrangements. The analysis merges two approaches, the GARCH model (Bollerslev, 1986) and the Markov switching model (Hamilton, 1989). The author discovers switches between high- and low-volatility regimes consistent with policy settings for Hungary, Poland, and, to a lesser extent, the Czech Republic, whereas Romania and Slovakia do not show a clear picture. Furthermore, he checks the robustness of the model regarding the choice of the error distribution and finds that heavy-tailed conditional distributions substantially improve the results.

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