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Anchor, Float or Abandon Ship: Exchange Rate Regimes for Accession Countries

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Author Info
Buiter, Willem H
Grafe, Clemens

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Abstract

The Paper considers alternative exchange rate regimes for the 10 East European accession candidates, both prior to EU accession and during the period following EU accession but prior to EMU membership. We conclude that from an economic point of view, EMU membership should be as early as possible, preferably at the same time as EU membership. The prevailing interpretation of the exchange rate criterion for EMU membership is that it requires two years of successful membership in the Exchange Rate Mechanism (ERM). If ERM membership presupposes EU membership, this would postpone the earliest possible date for EMU membership till two years after EU membership. Unrestricted financial capital mobility would be required during this period. We argue that a stay of two years or more in this ‘ERM purgatory’ would be pointless and costly. A derogation or waiver of the exchange rate requirement would therefore be desirable. Any credible fixed exchange rate regime prior to EMU membership would risk running afoul of the inflation criterion for EMU membership because of the Balassa-Samuelson effect. A temporary recession might be required to crawl under the inflation hurdle. To avoid this, a derogation from the inflation criterion for EMU membership, or a re-interpretation in terms of the inflation rate for traded goods prices only, is recommended. The use of the euro as a formal parallel currency in accession countries prior to EMU membership (or even prior to EU membership) deserves serious consideration. This would not require a derogation from any of the Treaty requirements.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3184.

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Date of creation: Jan 2002
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Handle: RePEc:cpr:ceprdp:3184

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Related research
Keywords: balassa-samuelson effect; emu; enlargement; euroisation;

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Find related papers by JEL classification:
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F15 - International Economics - - Trade - - - Economic Integration
F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
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  1. Zoltán M. Jakab & Mihály András Kovács, 1999. "Determinants of Real Exchange Rate Fluctuations in Hungary," MNB Working Papers 1999/6, Magyar Nemzeti Bank (The Central Bank of Hungary). [Downloadable!]
  2. Willem H. Buiter, 1981. "The Superiority of Contingent Rules over Fixed Rules in Models with Rational Expectations," NBER Technical Working Papers 0009, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Buiter, Willem H, 1997. "The Economic Case for Monetary Union in the European Union," Review of International Economics, Blackwell Publishing, vol. 5(4), pages 10-35, Supplemen.
  4. Calvo, Guillermo A & Leiderman, Leonardo, 1992. "Optimal Inflation Tax under Precommitment: Theory and Evidence," American Economic Review, American Economic Association, vol. 82(1), pages 179-94, March. [Downloadable!] (restricted)
  5. Paul R. Masson, 1999. "Monetary and Exchange Rate Policy of Transition Economies of Central and Eastern Europe after the Launch of EMU," IMF Policy Discussion Papers 99/5, International Monetary Fund.
  6. Poole, William, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 197-216, May. [Downloadable!] (restricted)
    Other versions:
  7. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging Market Countries," NBER Working Papers 7618, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Robert F. Westcott & Peter F. Christoffersen, 1999. "Is Poland Ready for Inflation Targeting?," IMF Working Papers 99/41, International Monetary Fund.
  9. Craig Beaumont & Robert J. Corker & Dora M. Iakova & Rachel van Elkan, 2000. "Exchange Rate Regimes in Selected Advanced Transition Economies - Coping with Transition, Capital Inflows, and EU Accession," IMF Policy Discussion Papers 00/3, International Monetary Fund.
  10. Roberto Chang & Andres Velasco, 1998. "Financial Fragility and the Exchange Rate Regime," NBER Working Papers 6469, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Kareken, John & Wallace, Neil, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 207-22, May. [Downloadable!] (restricted)
  12. Samuelson, Paul A, 1994. "Facets of Balassa-Samuelson Thirty Years Later," Review of International Economics, Blackwell Publishing, vol. 2(3), pages 201-26, October.
  13. Atish R. Ghosh & Anne-Marie Gulde & Holger C. Wolf, 2000. "Currency boards: More than a quick fix?," Economic Policy, CEPR, CES, MSH, vol. 15(31), pages 269-335, October. [Downloadable!] (restricted)
  14. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Bayoumi, Tamim & Masson, Paul R, 1994. "Fiscal Flows in the United States and Canada: Lessons for Monetary Union in Europe," CEPR Discussion Papers 1057, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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