The complexity of foreign exchange inter-connectivity with macro-financial related variables: analytical perspective on the CEE markets

This paper focuses on the correlation between foreign exchange rate and a series of variables related to macrofinancial economy at the level of the CEE countries. In the view of the financial crisis that brought forth a reaction of risk aversion among investors towards the emerging countries, it is questionnable if foreign direct investments under the impact of the exchange rate dynamic are still playing a positive role in the catching up process. We develop an econometric approach based on the VECM methodology that conducts to the impulse-response functions highlighting the interactions between financial and real economy, with a special emphasis on the contributions of foreign direct investments on the dynamic of the variables that capture the state of the macroeconomic environment. The research concludes that foreign direct investments act as a catalyst for the economic growth, enabling the real economy to react positively to the impulses of the financial flows.