The exchange rate effect on countries acceding to the EU

The main objective in this book is to analyze empirically the effect of the exchange rate on price in small open countries that are acceding to the EU during the period time 1996-2011. Based on variety of the theoretical and empirical evidence, the empirical investigation is carried out using Panel data model in order to investigate the effect of exchange rate on prices. Also, we have used more explanatory variables based on literature, as example Initial level of CPI-consumer index price and short term lending interest rate. The regression results show a positive and significant effect between exchange rate and price, which reveal that 1 percent of changes in the exchange, would change prices level for 1.79%. The empirical result indicates that stability of the exchange rate is very important for macroeconomic stability in the transition economy because it is a potential source of inflation. The countries acceding to the EU must weigh the relative cost and benefits associated which introducing a flexible exchange rate because such regime is likely to incur more costs than benefits.