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Money Rules For The Eurozone Candidate Countries

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  • Lucjan T Orlowski

    (Sacred Heart University)

Abstract

This study proposes the adoption of money growth rules as indicator variables of monetary policies by the countries converging to a common currency system, in particular, by the eurozone candidate countries. The analytical framework assumes an inflation target as the ultimate policy goal. The converging countries act in essence as “takers” of the inflation target, which, in this case, is the eurozone’s inflation forecast. The study advances a forward-looking money growth model that might be applied to aid monetary convergence to the eurozone. However, feasibility of adopting money growth rules depends on stable relationships between money and target variables, which are low inflation and stable exchange rate. Long-run interactions between these variables are examined for Poland, Hungary and the Czech Republic by employing a Johansen cointegration test, along with short-run effects assessed with a vector error correction procedure.

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File URL: http://128.118.178.162/eps/mac/papers/0501/0501033.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0501033.

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Length: 24 pages
Date of creation: 28 Jan 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0501033

Note: Type of Document - pdf; pages: 24
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Web page: http://128.118.178.162

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Keywords: common currency system; eurozone; monetary convergence; money growth rules; inflation targeting.;

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References

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  1. Brada, Josef C. & Ktan, Ali M., 2001. "The convergence of monetary policy between candidate countries and the European Union," ZEI Working Papers B 07-2001, ZEI - Center for European Integration Studies, University of Bonn.
  2. Lars E.O. Svensson & Michael Woodford, 2000. "Indicator Variables for Optimal Policy," NBER Working Papers 7953, National Bureau of Economic Research, Inc.
  3. Bofinger, Peter & Wollmershauser, Timo, 2001. "Is there a third way to EMU for the EU accession countries?," Economic Systems, Elsevier, vol. 25(3), pages 253-274, September.
  4. Stanley Fischer & Ratna Sahay & Carlos A. V�gh, 2002. "Modern Hyper- and High Inflations," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 837-880, September.
  5. Lucjan Orlowski, 2003. "Monetary Convergence and Risk Premiums in the EU Accession Countries," Open Economies Review, Springer, vol. 14(3), pages 251-267, July.
  6. Roberto Golinelli & Riccardo Rovelli, 2002. "Painless disinflation? Monetary policy rules in Hungary, 1991-99," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 10(1), pages 55-91, March.
  7. Daniel L. Thornton, 1983. "Why does velocity matter?," Review, Federal Reserve Bank of St. Louis, issue Dec, pages 5-13.
  8. von Hagen, J, 1995. "Inflation and Monetary Targeting in Germany," Papers 03, American Institute for Contemporary German Studies-.
  9. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers.
  10. Peter F. Christoffersen & Robert F. Westcott, 1999. "Is Poland Ready for Inflation Targeting?," IMF Working Papers 99/41, International Monetary Fund.
  11. Laurence Ball, 1998. "Policy Rules for Open Economies," NBER Working Papers 6760, National Bureau of Economic Research, Inc.
  12. Michael Bruno, 1992. "Stabilization and Reform in Eastern Europe: A Preliminary Evaluation," IMF Staff Papers, Palgrave Macmillan, vol. 39(4), pages 741-777, December.
  13. Orlowski, Lucjan T., 2001. "From inflation targeting to the euro-peg: A model of monetary convergence for transition economies," Economic Systems, Elsevier, vol. 25(3), pages 233-251, September.
  14. Jiri Jonas & Frederic S. Mishkin, 2003. "Inflation Targeting in Transition Countries: Experience and Prospects," NBER Working Papers 9667, National Bureau of Economic Research, Inc.
  15. Warnock, Francis E., 2003. "Exchange rate dynamics and the welfare effects of monetary policy in a two-country model with home-product bias," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 343-363, June.
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Citations

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Cited by:
  1. Lucjan T Orlowski, 2005. "Exchange Rate Risk and Convergence to the Euro," Macroeconomics 0501034, EconWPA.
  2. Lucjan T. Orlowski, 2005. "Targeting Relative Inflation Forecast as Monetary Policy Framework for Adopting the Euro," William Davidson Institute Working Papers Series wp754, William Davidson Institute at the University of Michigan.
  3. Kocenda, Evzen & Kutan, Ali M. & Yigit, Taner M., 2006. "Pilgrims to the Eurozone: How far, how fast?," Economic Systems, Elsevier, vol. 30(4), pages 311-327, December.
  4. Christian Dreger & Hans-Eggert Reimers & Barbara Roffia, 2007. "Long-Run Money Demand in the New EU Member States with Exchange Rate Effects," Eastern European Economics, M.E. Sharpe, Inc., vol. 45(2), pages 75-94, April.
  5. Lucjan T Orlowski, 2005. "Monetary Policy Adjustments on the Final Passage towards the Euro," Macroeconomics 0503022, EconWPA.
  6. Orlowski, Lucjan T., 2008. "Relative inflation-forecast as monetary policy target for convergence to the euro," Journal of Policy Modeling, Elsevier, vol. 30(6), pages 1061-1081.
  7. Sánchez, Marcelo, 2010. "Modelling anti-inflationary monetary targeting: with an application to Romania," Working Paper Series 1186, European Central Bank.

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