PUBLIC DEBT IMPROVES THE STABILITY OF EXCHANGE RATES IN DEVELOPING COUNTRIES? THE SPECIFIC CASE OF NEWS EUROPEAN MEMBERS (2004 AND 2007)

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Thibault Cuénoud

DOI:10.22495/rgcv1i2art3

Abstract

The aim of this paper is to speak about the current situation in Central and Eastern European countries (CEEC). The majority of them have been entering in European Union in 2004 and 2007. This step has been increasing their international attractiveness and improves their economic growth. However, they must stabilize exchange rate to sustain their foreign direct investment attraction. Two strategies are adopting about the regulation of exchange rate. Bulgarian, Estonia, Latvia, Lithuania Slovenia and Slovakia are entering in Exchange Rate Mechanism 2 (ERM2) to adopt quickly euro currency (it is now the case for Slovenia in 2007, Slovakia in 2009 and Estonia in 2011). Hungary, Poland, Czech Republic and Romania prefer only to stabilize their currency for the moment. Despite the strong economic dynamic of these countries before the Subprime crisis, the impact reveals the incapacity for several of them to improve currencies stabilities. The theoretical approach about Mundell-Fleming trilemma informs the necessity to scarify monetary policy in a context of free financial market and fixed exchange rate. In a reality, the capacity to use fiscal policy appears supplementary indeed more efficient.

Keywords: Central and Eastern European countries, foreign direct investment, regulation of exchange rate, Mundell-Fleming trilemma, monetary and fiscal policy.

How to cite this paper: Cuénoud, T. (2011). Public debt improves the stability of exchange rates in developing countries? The specific case of news European members (2004 and 2007). Risk Governance and Control: Financial Markets & Institutions, 1(2), 25-44. http://dx.doi.org/10.22495/rgcv1i2art3