Exchange Rate Regimes and the Transition Process in the Western Balkans

In the academic literature some criteria have been identified which could have an impact on the success of the transition process, such as macroeconomic stability, microeconomic restructuring and implementation of legal and institutional reforms. The role of the exchange rate system in general is to foster the stability of the monetary environment characterized by low inflation rates and a stable domestic currency. Although the importance of a sustainable price-level oriented monetary policy for the transition-success has been stressed in the academic literature, there are still further questions to be answered related to the choice of the exchange rate system throughout the different phases of the transition process. This paper intends to contribute to close this gap in the literature. The guiding research question is how the choice of an exchange rate system influences the economic success of a country in transition and its gradual integration within the European Union (EU) and the European Monetary Union (EMU). For this purpose, the study focuses on the transition process of South-eastern Europe (SEE). In particular and for the first time in a joint study, we will take a look at the following South-eastern European Countries (SEECs), often referred to as the “West Balkans”: Bosnia and Herzegovina (BiH), Croatia, Former Yugoslav Republic of Macedonia (FYRM), Serbia and Montenegro, as these five countries share certain common characteristics: they were part of the Former Yugoslav Republic (FYR); they are countries in transition; they are members of the Stability Pact for South-eastern Europe and they are all potential EU-accession candidates.