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Early Locking to the Euro: Some Estimates for the New EU Countries based on Equilibrium Exchange Rates

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  • Martin Melecky

Abstract

The ECB recommends to prospective euro-area members that they choose the central parities, for fixing their currencies against the euro, consistent with a broad range of economic indicators while taking account of the market rate as well. In this paper, we estimate a behavioral model of the real exchange rates for a group of the EU 5 countries, along with equilibrium real exchange rates. In addition, we propose a methodology for estimating an optimal timing for ERM II entry based on convergence properties of the equilibrium real exchange rate. We find that the estimated optimal timing for ERM II entry derived from the analysis of the equilibrium real exchange rate suggests that fixing the national currencies of the EU 5 countries in forthcoming years would not be in contradiction with the convergence properties of the real equilibrium exchange rate.

Suggested Citation

  • Martin Melecky, 2005. "Early Locking to the Euro: Some Estimates for the New EU Countries based on Equilibrium Exchange Rates," International Finance 0503008, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:0503008
    Note: Type of Document - pdf; pages: 32
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/if/papers/0503/0503008.pdf
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    More about this item

    Keywords

    Equilibrium Exchange Rate; ERM II Entry; Time-Series Panel Data;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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