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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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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. von Hagen, J, 1995. "Inflation and Monetary Targeting in Germany," Papers 03, American Institute for Contemporary German Studies-.
  2. Svensson, Lars & Woodford, Michael, 2000. "Indicator Variables for Optimal Policy," Seminar Papers 688, Stockholm University, Institute for International Economic Studies.
  3. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156 National Bureau of Economic Research, Inc.
  4. 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.
  5. Maurice Obstfeld and Kenneth Rogoff., 1995. "Exchange Rate Dynamics Redux," Center for International and Development Economics Research (CIDER) Working Papers C95-048, University of California at Berkeley.
  6. Michael Bruno, 1992. "Stabilization and Reform in Eastern Europe: A Preliminary Evaluation," IMF Staff Papers, Palgrave Macmillan, vol. 39(4), pages 741-777, December.
  7. Jiri Jonas & Frederic S. Mishkin, 2003. "Inflation Targeting in Transition Countries: Experience and Prospects," NBER Working Papers 9667, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  10. Lucjan Orlowski, 2003. "Monetary Convergence and Risk Premiums in the EU Accession Countries," Open Economies Review, Springer, vol. 14(3), pages 251-267, July.
  11. 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.
  12. Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
  13. Peter F. Christoffersen & Robert F. Westcott, 1999. "Is Poland Ready for Inflation Targeting?," IMF Working Papers 99/41, International Monetary Fund.
  14. 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.
  15. Daniel L. Thornton, 1983. "Why does velocity matter?," Review, Federal Reserve Bank of St. Louis, issue Dec, pages 5-13.
  16. 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.
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Cited by:
  1. Evzen Kocenda & Ali M. Kutan & Taner M. Yigit, 2005. "Pilgrims to the Eurozone: How Far, How Fast?," CERGE-EI Working Papers wp279, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  2. Dreger, Christian & Reimers, Hans-Eggert & Roffia, Barbara, 2006. "Long-run money demand in the new EU Member States with exchange rate effects," Working Paper Series 0628, European Central Bank.
  3. Orlowski, Lucjan T., 2004. "Exchange rate risk and convergence to the Euro," ZEI Working Papers B 25-2004, ZEI - Center for European Integration Studies, University of Bonn.
  4. 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.
  5. Lucjan T Orlowski, 2005. "Monetary Policy Adjustments on the Final Passage towards the Euro," Macroeconomics 0503022, EconWPA.
  6. 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.
  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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