Hitting and hoping?: Meeting the exchange rate and inflation criteria during a period of nominal convergence
This paper analyses the effect of the nominal convergence process on the ability of Central and Eastern European Countries (CEECs) to meet both the inflation and the exchange rate criteria for Eurozone entry. The size of these convergence effects on the exchange rate (for inflation targeters) and for inflation differentials (under a fixed exchange rate) is estimated for a variety of different convergence scenarios. The key result, robust across all scenarios, is that countries with fixed exchange rates will find it much harder to simultaneously meet the criteria than inflation targeters. Probit estimates on the ability of a country to get inflation below the reference value under a fixed exchange rate show a strong effect for the relative price level.
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