EFFECTS OF EXCHANGE RATE SHOCKS ON SHORT-TERM INTEREST RATES IN NEW EU MEMBER COUNTRIES

New EU member countries are still suffering from negative implications of economic crisis. Low interest rate environment and associated liquidity trap riskmotivated economists to investigate sources of interest rates volatility. We suggest that interest rates responsiveness to the exchange rate shocks can reveal substantial implications of relative exchange rate diversity and its importance during the crisis period. As such, sources of interest rates volatility may help to reveal side effects of the exchange rate regime choice affecting monetary policy decision making. In the paper we examineresponsiveness of short-term nominal interest rates to the exchange rate shocks in ten new EU member countries by employing SVAR methodology. We observed unique patterns of the short-term interest rates responsiveness in countries with different exchange rate arrangements that contributes to the fixed versus flexible exchange rate dilemma.