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Asymmetric Fluctuation Bands in the ERM and ERM II : Lessons and Challenges for New EU Member States of Central and Eastern Europe

  • BALÁZS �GERT
  • RAFAñ KIERZENKOWSKI
  • RAFAñ KIERZENKOWSKI
  • RAFAñ KIERZENKOWSKI

The enlargement of the European Union raises a series of questions related to new member states' entry to the EU's exchange rate mechanism II (ERM II) and their subsequent adoption of the euro. This paper considers how to determine the best initial central parity for new EU member states from Central and Eastern Europe toward entering ERM II. This is followed by a discussion of the asymmetric nature of the fluctuation bands around a central parity that could be deemed as compatible with the Maastricht criterion on exchange rate stability, i.e., within the officially announced ±15 percent fluctuation margins, at about +2.25 percent on the weaker side, with significantly more scope for appreciation on the stronger side. Thereby, the practices of the European Monetary Institute/European Central Bank and the European Commission are compared when assessing the Maastricht criterion. With this as a background, a hypothetical ERM II is constructed for four new EU member states with flexible exchange rate regimes, namely, the Czech Republic, Hungary, Poland, and Slovakia, to assess, ex post, the hypothetical fulfillment of the Maastricht criterion by these countries. Based on such an examination, fulfilling the criterion may prove a tricky task, which, inter alia, suggests the need for the careful selection of an appropriate initial ERM II central rate.

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Article provided by M.E. Sharpe, Inc. in its journal Eastern European Economics.

Volume (Year): 43 (2005)
Issue (Month): 1 (January)
Pages: 82-115

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Handle: RePEc:mes:eaeuec:v:43:y:2005:i:1:p:82-115
Contact details of provider: Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=106044

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