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On the Way of EMU Enlargement towards CEECs: What is the Appropriate Exchange Rate Regime?

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  • Maurel, Mathilde

Abstract

Focusing on a very rich panel of exchange rate regimes in transition countries, this Paper asks the question of the appropriate exchange rate regime for countries aiming at joining the EU, that is, subsequently, the EMU. Four arguments plead in favour of the adoption of a fixed exchange rate regime: (i) countries sharing the same currency inside a Currency Union (CU hereafter) trade well above the average, because of lower transaction costs; (ii) emerging countries are not able to manage counter-cyclical policies; (iii) in a world of increasing financial instability, only corner solutions are feasible; (iv) last, but not least, fixing CEECs currencies could be a necessary step in a global strategy of entering the EU, that is, subsequently, the EMU. This Paper examines the first of these four arguments, that is, the fostering of trade, and provides evidence that the extra trade implied by fixing the currency is in fact close to nil, as in Padko and Wall [2000]. One corollary is that the benefit from membership into the EMU, if any, cannot be explained by the transaction cost argument only. Besides fixed effects, the explanation of the level of trade integration is to be found in the external constraint. The latter is affected by trade (positively if intra-industry trade dominates), and by monetary and fiscal policy. Increasing government spending and manipulating the exchange rate or moving towards more floating regimes might make business cycles more symmetric, relax the external constraint, and finally favour further trade integration. Given that the co-variation of East-West business cycles is already dominated by intra- industry trade, one can conclude that joining the EU, that is, two years later, the EMU, is realistic and compatible with any exchange rate regime. Empirical evidence from Transition Countries shows that the exchange rate regime is not correlated with any fundamentals – better macro-economic performance, higher growth, or deeper trade integration – and should not allow to discriminate between candidate countries for entering the EU (as for other nominal criteria).

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3409.

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Date of creation: Jun 2002
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Handle: RePEc:cpr:ceprdp:3409

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Keywords: business cycle; eu enlargement; gravity equation; transition;

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References

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  1. Anne Marie Gulde & Juha Kähkönen & Peter Keller, 2000. "Pros and Cons of Currency Board Arrangements in the Lead-Up to EU Accession and Participation in the Euro Zone," IMF Policy Discussion Papers 00/1, International Monetary Fund.
  2. Coricelli, Fabrizio & Jazbec, Bostjan, 2004. "Real exchange rate dynamics in transition economies," Structural Change and Economic Dynamics, Elsevier, vol. 15(1), pages 83-100, March.
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Citations

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Cited by:
  1. Roberta De Santis, 2004. "Has Trade Structure Any Importance in the Trasmission of Currency Shocks? An Empirical Application for Central and Eastern European Acceding Countries to Eu," ISAE Working Papers 43, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
  2. Fidrmuc, Jarko & Iikka Korhonen, 2003. "Similarity of Supply and Demand Shocks Between the Euro Area and the CEECs," Royal Economic Society Annual Conference 2003 77, Royal Economic Society.
  3. António Afonso & Davide Furceri, 2007. "Business Cycle Synchronization and Insurance Mechanisms in the EU," Working Papers Department of Economics 2007/26, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  4. Fidrmuc, Jarko & Korhonen, Iikka, 2004. "A meta-analysis of business cycle correlation between the euro area and CEECs: What do we know – and who cares?," BOFIT Discussion Papers 20/2004, Bank of Finland, Institute for Economies in Transition.
  5. Jarko Fidrmuc & Iikka Korhonen, 2004. "The Euro goes East: Implications of the 2000–2002 Economic Slowdown for Synchronisation of Business Cycles between the Euro area and CEECs," Comparative Economic Studies, Palgrave Macmillan, vol. 46(1), pages 45-62, March.
  6. Jarko Fidrmuc & Iikka Korhonen, 2006. "Meta-Analysis of the Business Cycle Correlation between the Euro Area and the CEECs," CESifo Working Paper Series 1693, CESifo Group Munich.
  7. Peter Backé & Christian Thimann & Olga Arratibel & Oscar Calvo-Gonzalez & Arnaud Mehl & Carolin Nerlich, 2004. "The acceding countries’ strategies towards ERM II and the adoption of the euro - an analytical review," Occasional Paper Series 10, European Central Bank.
  8. Attila Csajbók (ed.) & Ágnes Csermely (ed.), 2002. "Adopting the euro in Hungary: expected costs, benefits and timing," MNB Occasional Papers 2002/24, Magyar Nemzeti Bank (the central bank of Hungary).

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