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Nonlinear Effects of Exchange Rate Shocks in Unofficially Euroized Economies: An Empirical Study for European Transition Economies

Although asymmetries or threshold effects describe the dynamics of exchange rate shocks in partially euroized economies, no research regarding this issue has been carried out. In order to fill this gap, we test for the presence of threshold effects in response to the level of unofficial euroization, and other variables suggested by the existing literature, to exchange rate shocks. We show how the responses to these shocks differ depending on the level of unofficial euroization in the observed country. For each of these cases and countries we use a methodology applicable to both the linear and the nonlinear model (Koop et al., 1996 ; Balke, 2000). Namely, we derive generalized impulse response functions (GIRF) that vary in sign and magnitude and allow regimes to switch after a shock. We expect to prove that highly euroized transition economies react differently to exchange rate shocks than the ones that have a lower degree of euroization. Hence, the goal of this research is to characterize the asymmetries in highly unofficially euroized economies and describe how they differ with respect to the level of unofficial euroization.

financial euroization; nonlinear; threshold; transition

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