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A Macroeconomic Analysis of EU Accession under Alternative Monetary Policies

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Author Info
MICHAEL B. DEVEREUX

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Abstract

This article provides an analytical discussion of the adjustment to EU accession for an economy under alternative assumptions about monetary policy rules. The post-accession phase is characterized by rapid capital inflows and real exchange rate appreciation. If accession is combined with membership of the euro area and a pegged exchange rate, then the post-accession period exhibits excessive foreign borrowing, high wage inflation, an excessive stock market boom, and much too rapid growth in the non-traded sector at the expense of the exportable goods sector. Alternative monetary policies can be used to eliminate the inefficiencies of the post-accession adjustment, but some bring real costs in terms of lower growth and unemployment. We find that the best policy is one of flexible inflation targeting with some weight on exchange rate stability. In the absence of exchange rate adjustment, fiscal policy could be used, but this requires complicated time-varying expenditure taxes. While the analytical discussion emphasizes the benefits of exchange rate adjustment, a later section of the article explores some more recent arguments regarding non-traditional costs of exchange rate volatility. Copyright (c) Blackwell Publishing Ltd 2003.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-5965.2003.00470.x
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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Common Market Studies.

Volume (Year): 41 (2003)
Issue (Month): 5 (December)
Pages: 941-964
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Handle: RePEc:bla:jcmkts:v:41:y:2003:i:5:p:941-964

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  1. Anna Lipinska, 2008. "The Maastricht Convergence Criteria and Optimal Monetary Policy for the EMU Accession Countries," Working Paper Series 896, European Central Bank. [Downloadable!]
    Other versions:
  2. Marcelo Sánchez, 2006. "Implications of monetary union for catching-up member states," Working Paper Series 630, European Central Bank. [Downloadable!]
  3. Lipinska, Anna, 2008. "The Maastricht Criteria and Optimal Monetary and Fiscal Policy Mix for the EMU Accession Countries," MPRA Paper 16376, University Library of Munich, Germany. [Downloadable!]
  4. Federico Ravenna, 2005. "The European Monetary Union as a Commitment Device for New EU Member States," Working Papers 98, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
    Other versions:
  5. Anna Lipinska, 2006. "Monetary regime choice in the accession countries - a theoretical analysis," Computing in Economics and Finance 2006 243, Society for Computational Economics. [Downloadable!]
  6. Lipinska, Anna, 2008. "The Maastricht Convergence Criteria and Monetary Regimes for the EMU Accession Countries," MPRA Paper 16375, University Library of Munich, Germany. [Downloadable!]
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