Monetary Policy Strategy And The Euro: Lessons from Cyprus
This paper examines how the fixed exchange rate policy followed in Cyprus for more than 40 years helped to deliver price stability amid high growth rates and low unemployment, and contributed to the successful adoption of the euro. The paper identifies some critical elements for the success of this strategy. Firstly, this policy was pursued by the Central Bank with no devaluations even in the most adverse conditions. This hard earned credibility of the Central Bank, along with the fact that the Bank’s decisions were taken independently from political interference, reinforced people’s belief in this strategy and thus anchored inflation expectations. Secondly, in order to ensure the sustainability of the regime, the authorities followed prudent economic policies for most of the time. The developments in credit and the current account served as warning indicators signalling possible threats to the sustainability of the fixed rate regime. Thirdly, in cases of imbalances the Central Bank resorted to the temporary use of non-traditional tools such as credit ceilings. The paper shows how this strategy was used to confront the new challenges arising from the road to the European Union (EU). Although the fixed exchange rate strategy remained in essence unchanged, it became more focused on the European orientation of the economy by switching to new anchor currencies (the ecu and the euro) well before accession. At the same time, a well thought out programme of structural reforms was underway in preparation for accession to the EU. Once in the EU the fixed exchange rate policy continued but greater flexibility was allowed so as to meet the challenges of the new liberalised environment.
|Date of creation:||Oct 2008|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.centralbank.gov.cy/nqcontent.cfm?a_id=1|
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