Question:

Refer to the data charts in Panels A and B above and discuss to what extent the decision to stay out of the Euro may have implied for the Czech Republic during the first decades of the 21st century, notably the Euro crisis (2011-2015). (Hint: this part is rather speculative, but the point is that you provide consistent reasoning that finds support both in the data shown above and in the analytical framework you are asked to present)

Transcribed Image Text:

In 2004, both Czech Republic and Slovak Republic (among others) became full members of the European Union. The two countries are the successor states of the former Czechoslovakia, which split up peacefully in 1992, soon after the fall of the iron curtain. Their long common history could justify the assumption that the two countries are fairly similar. Yet, while until today the Czech Republic has a mostly flexible exchange rate, Slovakia became a member of the Eurozone in 2009. The figure in panel (a) below shows the evolution of the exchange rates (normalized to have 1990=1) of the two countries with Germany, their main trading partner. They depreciate strongly until about 1999 and appreciate against the Deutsche Mark/ Euro subsequently. Since 2009 the Slovak Koruna is fixed, while the Czech Koruna is still floating. Consider also the figure in panel (b), which depicts the expansion of the two economies' GDP (relative to 1990) during the same period. In 2004, both Czech Republic and Slovak Republic (among others) became full members of the European Union. The two countries are the successor states of the former Czechoslovakia, which split up peacefully in 1992, soon after the fall of the iron curtain. Their long common history could justify the assumption that the two countries are fairly similar. Yet, while until today the Czech Republic has a mostly flexible exchange rate, Slovakia became a member of the Eurozone in 2009. The figure in panel (a) below shows the evolution of the exchange rates (normalized to have 1990=1) of the two countries with Germany, their main trading partner. They depreciate strongly until about 1999 and appreciate against the Deutsche Mark/ Euro subsequently. Since 2009 the Slovak Koruna is fixed, while the Czech Koruna is still floating. Consider also the figure in panel (b), which depicts the expansion of the two economies' GDP (relative to 1990) during the same period.

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Staying out of the Eurozone may have provided the Czech Republic with some flexibility in managing i... View the full answer