Optimal Monetary Strategies for Central and East European EU Candidates
The author argues that the high real interest rate policy persued in the Central and Eastern European Countries (CEEC) carries a risk of currency devaluation and recession when they join the European Monetary Union. Fear of demand-pull inflation has led the monetary authorities in the fast-growing CEEC to reduce the demand for credit by raising real interest rates, exceeding the interest parity relation with major EU markets. This policy has caused speculative capital inflows, distortion of capital allocation, real currency appreciation and trade deficits. Currency overvaluation will require a corrective devaluation via-a-vis the Euro during the final stages of accession to the EMU. Such a "last minute" correction is likely to destabilize CEEC banks and businesses by upsetting the balance between short-term foreign currency liabilities and long-term domestic assets. The author proposes that the CEEC EMU candidates adopt flexible inflation targeting instead of focusing on interest rates as a main disinflationary tool. This would assure accumulation of the proper amount of foreign currency reserves, reduce the current account deficit and ensure a smooth transition to the EMU. The new policy should be focused on defining and adopting a band of acceptable inflation rate targets and a "step down" path to alignment with the Euro.
Volume (Year): 31 (2000)
Issue (Month): 1 ()
|Contact details of provider:|| Web page: http://nysea.bizland.com/|
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Barro, Robert J & Gordon, David B, 1983.
"A Positive Theory of Monetary Policy in a Natural Rate Model,"
Journal of Political Economy,
University of Chicago Press, vol. 91(4), pages 589-610, August.
- Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
- LÃ¡szlÃ³ Halpern & Charles Wyplosz, 1997.
"Equilibrium Exchange Rates in Transition Economies,"
IMF Staff Papers,
Palgrave Macmillan, vol. 44(4), pages 430-461, December.
- Lionel Halpern & Charles Wyplosz, 1996. "Equilibrium Exchange Rates in Transition Economies," IMF Working Papers 96/125, International Monetary Fund.
- Svensson, Lars E.O., 1997.
"Price Level Targeting vs. Inflation Targeting: A Free Lunch?,"
614, Stockholm University, Institute for International Economic Studies.
- Lars E. O. Svensson, 1996. "Price Level Targeting vs. Inflation Targeting: A Free Lunch?," NBER Working Papers 5719, National Bureau of Economic Research, Inc.
- Svensson, L-E-O, 1996. "Price Level Targeting vs Inflation Targeting : A free Lunch?," Papers 614, Stockholm - International Economic Studies.
- Ben S. Bernanke & Frederic S. Mishkin, 1997.
"Inflation Targeting: A New Framework for Monetary Policy?,"
NBER Working Papers
5893, National Bureau of Economic Research, Inc.
- Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
- Dariusz Rosati, 1996. "Exchange rate policies during transition from plan to market," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 4(1), pages 159-184, 05.
- Lucjan T Orlowski, 1998. "Exchange-rate policies in central Europe and monetary union," Comparative Economic Studies, Palgrave Macmillan, vol. 40(3), pages 58-78, September.
- Peter S. Heller, 1997. "Fiscal Policy Management in an Open Capital Regime," IMF Working Papers 97/20, International Monetary Fund.
- Frederic S. Mishkin & Adam S. Posen, 1997.
"Inflation targeting: lessons from four countries,"
Economic Policy Review,
Federal Reserve Bank of New York, issue Aug, pages 9-110.
When requesting a correction, please mention this item's handle: RePEc:nye:nyervw:v:31:y:2000:i:1:p:42-54. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Eryk Wdowiak)
If references are entirely missing, you can add them using this form.