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Exchange Rate Arrangements in the Accession to the EMU

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  • Fabrizio Coricelli

    ([1] Department of Economics, University of Siena, Central European University, Budapest, Hungary [2] CEPR, London)

  • Boštjan Jazbec

    ([1] Faculty of Economics, University of Ljubljana, Slovenia [2] Bank of Slovenia, Slovenia)

Abstract

After accession to the European Union, new member countries have to decide the optimal path to the adoption of the euro. Some have argued that the euro should be adopted only when a sufficient degree of real convergence has been achieved. The idea is that real exchange rates will be affected by a real appreciation trend, which would imply higher inflation when countries enter the euro zone. This paper shows that Balassa–Samuelson effects are relevant, but such long-term considerations cannot justify maintaining flexibility of exchange rates for a long time. Another set of arguments in favour of delaying adoption of the euro is based on shorter-term considerations, namely the possibility of using nominal exchange rates to achieve a real exchange rate target and maintain competitiveness. However, this policy of real exchange rate targeting is likely to induce higher and more persistent inflation rates. This paper finds that the arguments in favour of flexibility of exchange rate and delay in the adoption of the euro are rather weak, and therefore a fast adoption of the Euro should be considered. Comparative Economic Studies (2004) 46, 4–22. doi:10.1057/palgrave.ces.8100046

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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: 4-22

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Handle: RePEc:pal:compes:v:46:y:2004:i:1:p:4-22

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Cited by:
  1. P.A.D. Cavelaars, 2003. "The Timing of EU Expansion and the Real Exchange Rate," DNB Staff Reports (discontinued) 89, Netherlands Central Bank.
  2. Dauti, Bardhyl & Bodo, Herzog, 2008. "Economic Convergence between Macedonia and European Monetary Union Member States. The Five Maastricht Criteria," MPRA Paper 21222, University Library of Munich, Germany, revised 2009.
  3. Martin Wagner & Jaroslava Hlouskova, 2004. "What's Really the Story with this Balassa-Samuelson Effect in the CEECs?," Diskussionsschriften dp0416, Universitaet Bern, Departement Volkswirtschaft.
  4. Zenon Kontolemis & Kevin Ross, 2005. "Exchange Rate Fluctuations in the New Member States of the European Union," Macroeconomics 0504015, EconWPA.
  5. Dmitri Boreiko, 2003. "EMU and accession countries: Fuzzy cluster analysis of membership," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(4), pages 309-325.
  6. Paul Cavelaars, 2002. "The Timing of EU Expansion and the Real Exchange Rate," MEB Series (discontinued) 2002-3, Netherlands Central Bank, Monetary and Economic Policy Department.
  7. Dimitri Boreiko, 2002. "EMU and Accession Countries: Fuzzy Cluster Analysis of Membership," Working Papers 71, Oesterreichische Nationalbank (Austrian Central Bank).
  8. Fabrizio Iacone & Renzo Orsi, 2002. "Exchange Rate Management and Inflation Targeting in the CEE Accession Countries," Eastward Enlargement of the Euro-zone Working Papers wp08, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 Aug 2002.

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