Options For The Exchange Rate Policies Of The EU Accession Countries (And Other Emerging Market Economies)
AbstractWe develop an institutional framework for central banks that try to pursue a stability-oriented monetary policy with the strategy of exchange rate targeting. Recent experience shows that a crucial element of this approach is to avoid destabilizing capital inflows. Policy makers can exert monetary pressure by two different but interrelated channels: the interest rate and the exchange rate. We introduce an open-economy Taylor Rule that determines the domestic interest rate of a central bank targeting a depreciation of its exchange rate. The interrelation of the two channels is taken into account by a risk premium adjusted uncovered interest parity condition. In our view sustained violations of this constraint provide an important explanation for the problem of speculative capital inflows. We distinguish between two basically different types of pegs: fixed nominal exchange rate targets and flexible nominal exchange rate targets. With the lessons that we draw from the past experiences of these regimes in Asia, Latin America, Eastern and Central Europe and the ERM I, we develop a framework for the exchange rate strategies of the accession countries during their path towards EMU entry.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2379.
Date of creation: Feb 2000
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Other versions of this item:
- Bofinger, Peter & Wollmershäuser, Timo, 2000. "Options for the exchange rate policies in the EU accession countries (and other emerging market economies)," W.E.P. - WÃ¼rzburg Economic Papers 13, University of Würzburg, Chair for Monetary Policy and International Economics.
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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