On the Way of EMU Enlargement towards CEECs: What is the Appropriate Exchange Rate Regime?
Focusing on a very rich panel of exchange rate regimes in transition countries, this Paper asks the question of the appropriate exchange rate regime for countries aiming at joining the EU, that is, subsequently, the EMU. Four arguments plead in favour of the adoption of a fixed exchange rate regime: (i) countries sharing the same currency inside a Currency Union (CU hereafter) trade well above the average, because of lower transaction costs; (ii) emerging countries are not able to manage counter-cyclical policies; (iii) in a world of increasing financial instability, only corner solutions are feasible; (iv) last, but not least, fixing CEECs currencies could be a necessary step in a global strategy of entering the EU, that is, subsequently, the EMU. This Paper examines the first of these four arguments, that is, the fostering of trade, and provides evidence that the extra trade implied by fixing the currency is in fact close to nil, as in Padko and Wall . One corollary is that the benefit from membership into the EMU, if any, cannot be explained by the transaction cost argument only. Besides fixed effects, the explanation of the level of trade integration is to be found in the external constraint. The latter is affected by trade (positively if intra-industry trade dominates), and by monetary and fiscal policy. Increasing government spending and manipulating the exchange rate or moving towards more floating regimes might make business cycles more symmetric, relax the external constraint, and finally favour further trade integration. Given that the co-variation of East-West business cycles is already dominated by intra- industry trade, one can conclude that joining the EU, that is, two years later, the EMU, is realistic and compatible with any exchange rate regime. Empirical evidence from Transition Countries shows that the exchange rate regime is not correlated with any fundamentals – better macro-economic performance, higher growth, or deeper trade integration – and should not allow to discriminate between candidate countries for entering the EU (as for other nominal criteria).
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Jun 2002|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
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.:
- Melitz, Jacques & Zumer, Frederic, 1999.
"Interregional and international risk-sharing and lessons for EMU,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 51(1), pages 149-188, December.
- Jacques Mélitz & Frédéric Zumer, 1999. "Interregional and International Risk Sharing and Lessons for EMU," Sciences Po publications n°2154, Sciences Po.
- Jacques Mélitz & Frédéric Zumer, 2000. "Interregional and International Risk Sharing and Lessons for EMU," EUI-RSCAS Working Papers 2, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
- Melitz, Jacques & Zumer, Frédéric, 1999. "Interregional and International Risk Sharing and Lessons for EMU," CEPR Discussion Papers 2154, C.E.P.R. Discussion Papers.
- Jacques Mélitz & Frédéric Zumer, 1999. "Interregional and International Risk Sharing and Lessons for EMU," Working Papers hal-01064863, HAL.
- Masson, Paul R., 2001.
"Exchange rate regime transitions,"
Journal of Development Economics,
Elsevier, vol. 64(2), pages 571-586, April.
- Anne Marie Gulde & Juha KÃ¤hkÃ¶nen & Peter M Keller, 2000. "Pros and Cons of Currency Board Arrangements in the Lead-Up to EU Accession and Participation in the Euro Zone," IMF Policy Discussion Papers 00/1, International Monetary Fund.
- Tamim Bayoumi & Barry Eichengreen, 1992.
"Shocking Aspects of European Monetary Unification,"
NBER Working Papers
3949, National Bureau of Economic Research, Inc.
- Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of European Monetary Unification," CEPR Discussion Papers 643, C.E.P.R. Discussion Papers.
- Tamim Bayoumi and Barry Eichengreen., 1992. "Shocking Aspects of European Monetary Unification," Economics Working Papers 92-187, University of California at Berkeley.
- International Monetary Fund, 2000. "Exchange Rate Regimes in Selected Advanced Transition Economies; Coping with Transition, Capital Inflows, and EU Accession," IMF Policy Discussion Papers 00/3, International Monetary Fund.
- Hamilton, C.B. & Winters, L.A., 1992. "Opening Up International Trade in Eastern Europe," Papers 511, Stockholm - International Economic Studies.
- Jeffrey A. Frankel & Andrew K. Rose, 1996.
"The Endogeneity of the Optimum Currency Area Criteria,"
NBER Working Papers
5700, National Bureau of Economic Research, Inc.
- Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-25, July.
- Frankel, Jeffrey A & Rose, Andrew K, 1996. "The Endogeneity of the Optimum Currency Area Criteria," CEPR Discussion Papers 1473, C.E.P.R. Discussion Papers.
- Mathilde Maurel & Guillaume Cheikbossian, 1998.
"The new geography of eastern european trade,"
- Coricelli, Fabrizio & Jazbec, Bostjan, 2001.
"Real Exchange Rate Dynamics in Transition Economies,"
CEPR Discussion Papers
2869, C.E.P.R. Discussion Papers.
- Coricelli, Fabrizio & Jazbec, Bostjan, 2004. "Real exchange rate dynamics in transition economies," Structural Change and Economic Dynamics, Elsevier, vol. 15(1), pages 83-100, March.
- Brada, Josef C & Mendez, Jose, 1988. "Exchange Rate Risk, Exchange Rate Regime and the Volume of International Trade," Kyklos, Wiley Blackwell, vol. 41(2), pages 263-80.
- Marc Flandreau & Mathilde Maurel, 2001.
"Monetary Union, Trade Integration, and Business Cycles in 19th Century Europe: Just Do It,"
- Marc Flandreau & Mathilde Maurel, 2001. "Monetary Union, Trade Integration, and Business Cycles in 19th Century Europe: Just Do It," Sciences Po publications n°3087, Sciences Po.
- Flandreau, Marc & Maurel, Mathilde, 2001. "Monetary Union, Trade Integration, and Business Cycles in 19th Century Europe: Just Do It," CEPR Discussion Papers 3087, C.E.P.R. Discussion Papers.
- Frankel, Jeffrey A & Rose, Andrew K, 2000. "An Estimate of the Effect of Currency Unions on Trade and Output," CEPR Discussion Papers 2631, C.E.P.R. Discussion Papers.
- Lionel Fontagné & Michael Freudenberg, 1999. "Endogenous Symmetry of Shocks in a Monetary Union," Open Economies Review, Springer, vol. 10(3), pages 263-287, July.
- Michael R. Pakko & Howard J. Wall, 2001. "Reconsidering the trade-creating effects of a currency union," Review, Federal Reserve Bank of St. Louis, issue May, pages 37-46.
- repec:spo:wpecon:info:hdl:2441/765 is not listed on IDEAS
- Kutan, Ali M. & Pautola-Mol, Niina, 2001. "Integration of the Baltic states into the EU and institutions of fiscal convergence: A critical evaluation of key issues and empirical evidence," ZEI Working Papers B 10-2001, University of Bonn, ZEI - Center for European Integration Studies.
- Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 7-46, 04.
- de Melo, Martha & Denizer, Cevdet & Gelb, Alan, 1996. "From plan to market : patterns of transition," Policy Research Working Paper Series 1564, The World Bank.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:3409. 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: ()
If references are entirely missing, you can add them using this form.