Some evidence of exchange market pressure in the EU4 countries 1 Daniel Stavárek Department of Finance Silesian University, School of Business Administration Karviná, Czech Republic Abstract This paper estimates the exchange market pressure (EMP) on currencies of EU4 countries (Czech Republic, Hungary, Poland, Slovakia) during the period 1993-2005. Therefore, it is one of a very few studies focused on this region and the very first paper applying the model- dependent approach to the EMP estimation on these countries. Moreover, the model proposed by Spolander (1999) is used in the paper along with quarterly data. Thus, this paper, tests the suitability of this model for the countries analysed. Regarding the results obtained, EMP is of similar magnitude in all countries except Poland. We found that EMP was significantly lower and less volatile during the periods when a floating exchange rate arrangement was applied than in periods with fixed exchange rates. It implies that unavoidable entry into ERM II (a quasi-fixed regime) could lead to the EMP increase during the period of the exchange rate stability criterion fulfilment. Hence, a revision of the current definition and understanding of the criterion fulfilment is suggested. Since the model estimation was burdened by some factors reducing the estimates validity we also propose some modifications and extensions of the methodology applied. Keywords : exchange market pressure, Central Europe, model- dependent approach, exchange rate stability criterion 1. Introduction Eight countries from Central and Eastern Europe (hereafter EU8) joined the European Union (hereafter EU) in the spring of 2004 and completed the transformation from centrally planned economies to market economies. Moreover, it is expected that they will also join the Eurozone and implement the euro as their legal tender. However, membership in the Eurozone is conditioned by fulfilment of the Maastricht criteria. One of which is the criterion of the national currency’s stability in the period preceding entry into the Eurozone. This criterion is associated with specific exchange rate regime, ERM II, which must be adapted by all countries with regimes whose principles do not correspond with the ERM II’s spirit. 2 It means that all EU8 countries except Estonia and Lithuania had or will have to modify their exchange rate arrangement when joining ERM II. 3 The Czech 1 Elaboration of the paper was supported by the Czech Science Foundation within the project GAČR 402/05/2758 “Integration of the financial sector of the new EU member countries into the EMU”. 2 The group of incompatible regimes includes crawling pegs, free floats or managed floats without a mutually agreed central rate and pegs to anchors other than the euro. 3 As of 30 th August 2006, five of the EU8 (Estonia, Latvia, Lithuania, Slovakia and Slovenia) joined the ERM II. Nevertheless, the exchange rate regime in Latvia was very similar with the ERM II, thus the “costs” of the regime’s 1