How Credible are the Exchange Rate Regimes of the EU Accession Countries? Empirical Evidence from Market Sentiments

EU accession countries have strong incentives to stabilize the exchange rate with respect to the Euro as the nominal anchor. We present a microstructure model of the foreign exchange market based on technical trading that allows to categorize the de facto the exchange rate regimes and derive a market based measure of the credibility of these exchange rate regimes. We empirically determine the de facto exchange rate regimes of EU accession countries and test their credibility as assessed by the market participants. In the run-up to EU accession most CEEC have reached high credibility in their exchange rate management. However, some of the future EU and EMU participants will have to strengthen their efforts and further focus their exchange rate policy on stabilizing the Euro exchange rate