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Convergence Expectations and Convergence Strategies. Lessons from the Hungarian Experiences in the pre-EU period1

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  • Agnes Csermely

    ()
    (Magyar Nemzeti Bank, Szabads�g t�r 8-9, H-1850 Budapest, Hungary.)

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    Abstract

    Eurozone convergence provides a unique opportunity for accession countries to abandon macroeconomic stabilisation policies that suffer from weak credibility. On the other hand, expectations of future improvements in macroeconomic variables and trend appreciation of the currency may undermine the relationship between interest rates, exchange rates and economic fundamentals, making the economy vulnerable to sudden changes in market sentiments regarding the timing and path to Eurozone accession. Recent developments in Hungary illustrate the impact of changing expectations on exchange rate and interest rate volatility. Two lessons can be drawn from the Hungarian experience. First, benign market sentiment and easier access to finance does not imply less pressure to correct macroeconomic imbalances in the long run. Second, convergence strategies should be robust with respect to sudden shifts in capital flows. Programmes should maintain the shock absorbing capacity of fiscal and monetary policies and offer a contingency margin to ensure compliance with the announced adjustment plan in case of unforeseen developments. Slower convergence programmes might be more successful. Comparative Economic Studies (2004) 46, 104–126. doi:10.1057/palgrave.ces.8100043

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal Comparative Economic Studies.

    Volume (Year): 46 (2004)
    Issue (Month): 1 (March)
    Pages: 104-126

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    Handle: RePEc:pal:compes:v:46:y:2004:i:1:p:104-126

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    Web page: http://www.palgrave-journals.com/

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    Postal: Palgrave Macmillan Journals, Subscription Department, Houndmills, Basingstoke, Hampshire RG21 6XS, UK
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    Cited by:
    1. Jesús Rodríguez López & José Luis Torres Chacón, 2006. "Following the yellow brick road? The Euro, the Czech Republic, Hungary and Poland," Working Papers 06-03, Asociación Española de Economía y Finanzas Internacionales.
    2. Lucjan T Orlowski, 2005. "Exchange Rate Risk and Convergence to the Euro," Macroeconomics 0501034, EconWPA.
    3. Matkowski, Z. & Prochniak, M., 2004. "Real Economic Convergence in the EU Accession Countries," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 1(3), pages 5-38.
    4. Orlowski, Lucjan T., 2008. "Relative inflation-forecast as monetary policy target for convergence to the euro," Journal of Policy Modeling, Elsevier, vol. 30(6), pages 1061-1081.

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