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Monetary regime choice in the accession countries - a theoretical analysis

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Author Info
Anna Lipinska () (IDEA Universitat Autonoma de Barcelona)

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Abstract

This paper studies the choice of the monetary regime in a small open economy with special focus on the EMU accession countries. In the framework of a two - country DSGE model we conduct policy experiments consisting in analysing the effects of different monetary regimes (roughly representing the current choices of the accession countries) on the dynamics and volatility of an accession economy. We study the real exchange rate determination in the long run and the short run as it summarises the pattern of the stabilisation of an accession economy in response to the shocks. Our benchmark analysis indicates that the managed float regime can attain the lowest consumption gap and at the same time guarantee the moderate changes in the nominal interest rate, nominal exchange rate and inflation. However parameters summarising its sensitivity to nominal exchange rate movements and inflation pressures depend on the underlying shocks. Additionally the sensitivity analysis indicates that choice of the monetary regime is dependent also on the specific structure of a small open economy. In particular a small share of nontradables, a high degree of openness and the high pass through are advocates for the managed regimes frequently observed in the accession countries.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 243.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:243

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Related research
Keywords: monetary regime choice; real exchange rate dynamics; accession economies;

Find related papers by JEL classification:
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
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  2. Broeck, Mark De & Sløk, Torsten, 2001. "Interpreting real exchange rate movements in transition countries," BOFIT Discussion Papers 7/2001, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
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  3. Gilles DUFRENOT & Balazs Egert, 2003. "Real Exchange Rates in Central and Eastern Europe : What Scope for the Underlying Fundamentals?," Development and Comp Systems 0309001, EconWPA. [Downloadable!]
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  4. Linda S. Goldberg, 2005. "Trade Invoicing in the Accession Countries: Are They Suited to the Euro?," NBER Chapters, in: NBER International Seminar on Macroeconomics 2005 National Bureau of Economic Research, Inc. [Downloadable!]
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  5. Benigno, Gianluca & Benigno, Pierpaolo, 2008. "Exchange rate determination under interest rate rules," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 971-993, October. [Downloadable!] (restricted)
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  7. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May. [Downloadable!] (restricted)
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  8. Michael B. Devereux, 2003. "A Macroeconomic Analysis of EU Accession under Alternative Monetary Policies," Journal of Common Market Studies, Blackwell Publishing, vol. 41(5), pages 941-964, December. [Downloadable!] (restricted)
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  10. Jose De Gregorio & Holger C. Wolf, 1994. "Terms of Trade, Productivity, and the Real Exchange Rate," Working Papers 94-19, New York University, Leonard N. Stern School of Business, Department of Economics.
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  12. Claudio Soto, 2003. "Non-Traded Goods and Monetary Policy Trade-Offs in a Small Open Economy," Working Papers Central Bank of Chile 214, Central Bank of Chile. [Downloadable!]
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  14. Fabrizio CORICELLI & Bostjan JAZBEC & Igor MASTEN, 2004. "Exchange Rate Pass-Through in Acceding Countries: The Role of Exchange Rate Regimes," Economics Working Papers ECO2004/16, European University Institute. [Downloadable!]
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  16. Bianca De Paoli, 2004. "Monetary Policy and Welfare in a Small Open Economy," CEP Discussion Papers dp0639, Centre for Economic Performance, LSE. [Downloadable!]
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  18. Fabrizio Coricelli, 2002. "Exchange rate policy during transition to the European Monetary Union: The option of euroization," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 10(2), pages 405-417, July. [Downloadable!] (restricted)
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