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Asymmetric Fluctuation Bands in the ERM and ERM II : Lessons and Challenges for New EU Member States of Central and Eastern Europe

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  • BALÁZS �GERT
  • RAFAñ KIERZENKOWSKI
  • RAFAñ KIERZENKOWSKI
  • RAFAñ KIERZENKOWSKI

Abstract

The enlargement of the European Union raises a series of questions related to new member states' entry to the EU's exchange rate mechanism II (ERM II) and their subsequent adoption of the euro. This paper considers how to determine the best initial central parity for new EU member states from Central and Eastern Europe toward entering ERM II. This is followed by a discussion of the asymmetric nature of the fluctuation bands around a central parity that could be deemed as compatible with the Maastricht criterion on exchange rate stability, i.e., within the officially announced ±15 percent fluctuation margins, at about +2.25 percent on the weaker side, with significantly more scope for appreciation on the stronger side. Thereby, the practices of the European Monetary Institute/European Central Bank and the European Commission are compared when assessing the Maastricht criterion. With this as a background, a hypothetical ERM II is constructed for four new EU member states with flexible exchange rate regimes, namely, the Czech Republic, Hungary, Poland, and Slovakia, to assess, ex post, the hypothetical fulfillment of the Maastricht criterion by these countries. Based on such an examination, fulfilling the criterion may prove a tricky task, which, inter alia, suggests the need for the careful selection of an appropriate initial ERM II central rate.

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Bibliographic Info

Article provided by M.E. Sharpe, Inc. in its journal Eastern European Economics.

Volume (Year): 43 (2005)
Issue (Month): 1 (January)
Pages: 82-115

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Handle: RePEc:mes:eaeuec:v:43:y:2005:i:1:p:82-115

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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=106044

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  1. Balázs Égert & Imed Drine & Kirsten Lommatzsch & Christophe Rault, 2005. "The Balassa-Samuelson Effect in Central and Eastern Europe: Myth or Reality?," Documents de recherche 05-15, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  2. R. Golinelli & R. Orsi, 2001. "Hungary and Poland," Working Papers 424, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. Michael Reutter & Hans-Werner Sinn, 2000. "The Minimum Inflation Rate for Euroland," CESifo Working Paper Series 377, CESifo Group Munich.
  4. Lommatzsch, Kirsten & Tober, Silke, 2004. "What is behind the real appreciation of the accession countries' currencies?: An investigation of the PPI-based real exchange rate," Economic Systems, Elsevier, vol. 28(4), pages 383-403, December.
  5. Ronald MacDonald & Luca Ricci, 2001. "PPP and the Balassa Samuelson Effect: the Role of the Distribution Sector," CESifo Working Paper Series 442, CESifo Group Munich.
  6. Virginie Coudert & Cécile Couharde, 2003. "Exchange Rate Regimes and Sustainable Parities for ceecs in the Run-up to emu Membership," Revue économique, Presses de Sciences-Po, vol. 54(5), pages 983-1012.
  7. Balázs Egert, 2002. "Investigating the Balassa-Samuelson hypothesis in the transition: Do we understand what we see? A panel study," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 10(2), pages 273-309, July.
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Cited by:
  1. Jan Filácek & Roman Horváth & Michal Skorepa, 2006. "Monetary Policy before Euro Adoption: Challenges for EU New Members," William Davidson Institute Working Papers Series wp853, William Davidson Institute at the University of Michigan.
  2. Juraj Antal & Jan Filáček & Jan Frait & Roman Horvath & Viktor Kotlán & Michal Skořepa, 2009. "Monetary Policy Strategies before Euro Adoption: The Art of Chasing Many Rabbits," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 3(2), pages 176-198, July.

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