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This study is devoted to an extension of Dibooglu and Kutan's work (Journal of Comparative Economics, 29(2), June 2001) in two directions. First, a bivariate VAR, including the real effective exchange rate (REER) and the inflation, is tested not only for Hungary and Poland, but also for the Czech Republic, over the 1992:12-2002:12 time period. Second, industrial production is added to the multivariate VAR in order to investigate the effects of nominal and real shocks on output. By this way, we (wish to) illustrate the gains and costs of the actual exchange rate regime and draw some conclusions on the likely economic outcomes of adopting a firmly fixed exchange rate regime. Two main conclusions can be drawn from our empirical work: (1) contrary to Dibooglu and Kutan (2001), we find a quite high degree of flexibility in the CPI, which reveals the lower importance of administered prices and the substantial progress made by these economies towards a market economy; (2) in contrast to the Czech Republic and Hungary, nominal shocks appears to have a very strong effect on the REER in Poland. Especially, fluctuations in the nominal exchange rate explain a large part of fluctuations in the REER in this latter country.

How would a fixed-exchange-rate regime fit the transition economies?