With EU accession looming, a new chapter has been opened in the debate about the candidate countries' exchange rate strategies. A heated discussion has arisen in relation to ERM2 membership. The experience of the present eurozone members with ERM/ERM2 membership shows that none of them faced a significant challenge in the two-year 'evaluation' period in terms of the exchange rate stability convergence criterion. This could also be attributable to the stability policies prescribed by the Maastricht Treaty. However, for catching-up countries in the run-up to joining the eurozone, given the existing functioning of the mechanism, the ERM2 appears be of little help for ensuring exchange rate stability. The mechanism should be viewed rather as a tool for 'persuading' the markets of the appropriateness of the euro-locking rate. Since the Maastricht rules do not allow downward adjustment of the central parity within the ERM2 for two years before introduction of the euro, the authorities should be familiar with the preferred real exchange rate path prior to entering the mechanism. We conclude that countries could face large costs if they fail to do so.
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Paper provided by Czech National Bank, Research Department in its series Working Papers with number
2003/11.
Find related papers by JEL classification: E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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