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Accession to EMU and exchange rate policies in Central Europe - decision under institutional constraints

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  • Andreas Freytag

Abstract

Currently, five Central and Eastern European (CEE) countries are negotiating about the membership in the European Union: Czech Republic, Estonia, Hungary, Poland and Slovak Republic. There is a broad consensus that they will eventually become members of the European Monetary Union. This requires careful analysis of the appropriate exchange rate regime prior to the accession. The exchange rate arrangement of the EU applicants plays an important - but not exclusive - role in their policy-mix. The history of transition economies as well as of other emerging markets illustrates that exchange rate policies as such are not a distinctive factor for the success and failure of monetary policy with respect to price stability. In this paper it is argued that this outcome has not emerged by chance. There is no naturally superior exchange rate regime that can be applied to all advanced countries in transition aiming at stability. By way of contrast, an exchange rate arrangement is part of the monetary regime, which itself is a component of the economic order. The latter consists of both politically chosen and spontaneously evolved institutions. This leads to the hypothesis that the choice of an exchange rate arrangement in CEE is constrained by this institutional setting. The theoretical considerations as well as empirical evidence indeed suggest that for guaranteeing stability, beside the legal monetary commitment (part of which being the exchange rate regime) the institutional framework in the country is decisive. If the latter matches the commitment, the credibility of a monetary regime is relatively high, obviously encouraging monetary stability. Therefore, the institutional setting in each country should be analysed extensively before an exchange rate arrangement is chosen.

Suggested Citation

  • Andreas Freytag, 2002. "Accession to EMU and exchange rate policies in Central Europe - decision under institutional constraints," Bank of Estonia Working Papers 2002-1, Bank of Estonia, revised 12 Oct 2002.
    • Handle: RePEc:eea:boewps:wp2002-01
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    References listed on IDEAS

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    1. Robert J. Barro, 1983. "Inflationary Finance under Discretion and Rules," Canadian Journal of Economics, Canadian Economics Association, vol. 16(1), pages 1-16, February.
    2. Cukierman Alex, 1992. "CENTRAL BANK STRATEGY, CREDIBILITY, AND INDEPENDANCE: THEORY AND EVIDENCE: Compte Rendu par Dominique Cariofillo," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 3(4), pages 581-590, December.
    3. Fidrmuc, Jan, 2000. "Liberalization, democracy and economic performance during transition," ZEI Working Papers B 05-2000, University of Bonn, ZEI - Center for European Integration Studies.
    4. Mr. Charles Enoch & Mr. Tomás J. T. Baliño, 1997. "Currency Board Arrangements: Issues and Experiences," IMF Occasional Papers 1997/005, International Monetary Fund.
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    6. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, December.
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    Cited by:

    1. Jürgen von Hagen & Iulia Siedschlag, 2010. "Managing Capital Flows: Experiences from Central and Eastern Europe," Chapters, in: Masahiro Kawai & Mario B. Lamberte (ed.), Managing Capital Flows, chapter 7, Edward Elgar Publishing.
    2. Michel Aglietta & Camille Baulant & Sandra Moatti, 2003. "Les PECO devant la tentation de l'euro," Economie Internationale, CEPII research center, issue 93, pages 11-36.
    3. Rasmus Kattai, 2004. "Analyzing the Suitability of the Currency Board Arrangement for Estonia’s Accession to the EMU," University of Tartu - Faculty of Economics and Business Administration, in: Modelling the Economies of the Baltic Sea Region, volume 17, chapter 6, pages 167-205, Faculty of Economics and Business Administration, University of Tartu (Estonia).

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