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Monetary Policy Adjustments on the Final Passage towards the Euro

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  • Lucjan T Orlowski

    (Sacred Heart University)

Abstract

This study reviews monetary policy options that are seemingly viable for adopting the euro by the new Member States of the European Union. A fully autonomous direct inflation targeting is believed to be suboptimal for convergence to the euro as it does not incorporate convergence parameters into the central bank reaction function and instrument rules. In an attempt to correct for such deficiency, this study advocates adopting a framework of relative inflation forecast targeting where a differential between the domestic and the eurozone inflation forecasts becomes the main objective of the central bank’s decisions. At the same time, some attention to the exchange rate stability objective becomes necessary for facilitating the monetary convergence process. Foreign exchange market interventions, rather than interest rate adjustments, are viewed as a preferred way of achieving this objective.

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File URL: http://128.118.178.162/eps/mac/papers/0503/0503022.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0503022.

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Length: 20 pages
Date of creation: 29 Mar 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0503022

Note: Type of Document - pdf; pages: 20
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Web page: http://128.118.178.162

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Keywords: Monetary convergence; euro adoption; ERM II; new Member States;

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