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Nominal versus Real Convergence with Respect to EMU Accession - EMU Entry Scenarios for the New Member States

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Author Info
Gunther Schnabl (Tübingen University)
Paul De Grauwe (Catholic University Leuven)

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Abstract

This paper explores the conflict of real and monetary convergence during the EMU run-up of the Central and Eastern European new EU member states. Based on a Balassa-Samuelson model of productivity driven inflation, it finds a high probability of higher inflation in the new member states. It compares the policy options which might make the compliance possible, i.e., fiscal tightening and nominal appreciation within the ERM2 band. Nominal appreciation within ERM2 seems the better option to achieve the compliance with the Maastricht criteria as no discretionary government intervention is necessary and losses in terms of real growth are less. Having once opted for nominal appreciation within ERM2 by fixing the ERM2 entry rate as the ERM2 central rate (Irish model), a high degree of flexibility is provided in coping with erratic short-term capital inflows. Setting the ERM2 entry rate above the ERM2 central rate (Greek model) implies a clear exchange rate path within ERM2 and thereby less exchange rate volatility. Despite the merits of nominal appreciation, countries committed to hard euro pegs or with high budget deficits might choose fiscal contraction as a solution, which will require a high degree of fiscal flexibility and thereby decisive

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Paper provided by EconWPA in its series International Finance with number 0403008.

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Length: 27 pages
Date of creation: 15 Mar 2004
Date of revision: 05 Jul 2004
Handle: RePEc:wpa:wuwpif:0403008

Note: Type of Document - pdf; pages: 27
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Web page: http://129.3.20.41

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Related research
Keywords: EMU; ERMII; Balassa-Samuelson Effect; Real Appreciation; Monetary Union; Central and Eastern Europe.;

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
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
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Jakub Borowski & Michal Brzoza- Brzezina & Piotr Szpunar, 2003. "Exchange Rate Regimes and Poland's Participation in ERM II," Macroeconomics 0302002, EconWPA. [Downloadable!]
  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. [Downloadable!]
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  3. Alejandro Micco & Ernesto Stein & Guillermo OrdoÒez, 2003. "The currency union effect on trade: early evidence from EMU," Economic Policy, CEPR, CES, MSH, vol. 18(37), pages 315-356, October. [Downloadable!] (restricted)
    Other versions:
  4. 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.
  5. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate Of The Effect Of Common Currencies On Trade And Income," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 437-466, May. [Downloadable!] (restricted)
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  6. De Grauwe, Paul & Dewachter, Hans & Veestraeten, Dirk, 1999. "Explaining Recent European Exchange-Rate Stability," International Finance, Blackwell Publishing, vol. 2(1), pages 1-31, April. [Downloadable!] (restricted)
  7. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September. [Downloadable!] (restricted)
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  8. Buiter, Willem H & Grafe, Clemens, 2002. "Anchor, Float or Abandon Ship: Exchange Rate Regimes for Accession Countries," CEPR Discussion Papers 3184, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  9. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings, Federal Reserve Bank of Kansas City, pages 329-368. [Downloadable!]
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  10. Lionel Halpern & Charles Wyplosz, 1996. "Equilibrium Exchange Rates in Transition Economies," IMF Working Papers 96/125, International Monetary Fund.
  11. Jeffrey A. Frankel & Andrew K. Rose, 1996. "The Endogeneity of the Optimum Currency Area Criteria," NBER Working Papers 5700, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gunther Schnabl & Christian Danne, 2007. "A Role Model for China? Exchange Rate Flexibility and Monetary Policy in Japan," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  2. Gunther Schnabl, 2006. "The Evolution of the East Asian Currency Baskets – Still Undisclosed and Changing," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. Pelinescu, Elena & Caraiani, Petre, 2006. "Does the Inflation Targeting Have a Positive Role upon the Convergence of the Inflation Rate?," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 3(3), pages 39-50, September. [Downloadable!]
  4. Gunther Schnabl, 2007. "Exchange Rate Volatility and Growth in Emerging Europe and East Asia," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  5. Gunther Schnabl, 2007. "Exchange rate volatility and growth in small open economies at the EMU periphery," Working Paper Series 773, European Central Bank. [Downloadable!]
    Other versions:
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