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Integrated monetary and exchange rate frameworks: are there empirical differences?

  • Lucio Vinhas de Souza

    ()

The aim of the paper is to empirically estimate whether the different monetary and exchange rate frameworks observed in the accession countries of Central and Eastern Europe and the Baltic States do yield different outcomes in terms of level and variance of a set of nominal and real variables. The author follows and extends the methodology developed by Kuttner and Posen (2001), who perform a combined analysis of the individual effects of exchange rate regimes, central bank independence and announced targets in nominal variables for a large set of developed and developing countries. They also estimate that a set-up combining a free float, an independent currency board and inflation targeting yields an outcome that mimics the price stabilisation advantages of a hard peg without its drawbacks in terms of extreme volatility. This sample of countries, not covered by the Kuttner and Posen study, supports their conclusions for both nominal and real variables, testing for both the individual and combined effects of the frameworks and indicating that a flexible exchange rate regime, coupled with CBI and DIT, would be Pareto-improving when compared to harder regimes.

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Paper provided by Bank of Estonia in its series Bank of Estonia Working Papers with number 2002-2.

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Length: 38 pages
Date of creation: 11 Oct 2002
Date of revision: 12 Oct 2002
Publication status: published
Handle: RePEc:eea:boewps:wp2002-02
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  1. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  2. Cukierman, Alex & Miller, Geoffrey & Neyapti, Bilin, 2001. "Central Bank Reform, Liberalization and Inflation in Transition Economies - An International Perspective," CEPR Discussion Papers 2808, C.E.P.R. Discussion Papers.
  3. Vivek B. Arora & Olivier Jeanne, 2001. "Economic Integration and the Exchange Rate Regime: Some Lessons from Canada," IMF Policy Discussion Papers 01/1, International Monetary Fund.
  4. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging Market Countries," NBER Working Papers 7618, National Bureau of Economic Research, Inc.
  5. Daniel Gros & Marc Suhrcke, 2000. "Ten Years After: What is Special about Transition Countries?," CESifo Working Paper Series 327, CESifo Group Munich.
  6. Kenneth N. Kuttner, 2001. "Beyond Bipolar: A Three-Dimensional Assessment of Monetary Frameworks," Working Papers 52, Oesterreichische Nationalbank (Austrian Central Bank).
  7. Eduardo Levy-Yeyati & Federico Sturzenegger, 2003. "To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth," American Economic Review, American Economic Association, vol. 93(4), pages 1173-1193, September.
  8. Guy Debelle, 1997. "Inflation Targeting in Practice," IMF Working Papers 97/35, International Monetary Fund.
  9. Atish R. Ghosh & Anne-Marie Gulde & Jonathan D. Ostry & Holger C. Wolf, 1997. "Does the Nominal Exchange Rate Regime Matter?," NBER Working Papers 5874, National Bureau of Economic Research, Inc.
  10. de Haan, Jakob & Berger, Helge & van Fraassen, Erik, 2001. "How to reduce inflation: an independent central bank or a currency board? The experience of the Baltic countries," Emerging Markets Review, Elsevier, vol. 2(3), pages 218-243, September.
  11. Prakash Loungani & Nathan Sheets, 1995. "Central bank independence, inflation and growth in transition economies," International Finance Discussion Papers 519, Board of Governors of the Federal Reserve System (U.S.).
  12. Peter F. Christoffersen & Robert F. Westcott, 1999. "Is Poland Ready for Inflation Targeting?," IMF Working Papers 99/41, International Monetary Fund.
  13. Svensson, L.E.O., 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," Papers 595, Stockholm - International Economic Studies.
  14. Hélène Poirson, 2001. "How Do Countries Choose their Exchange Rate Regime?," IMF Working Papers 01/46, International Monetary Fund.
  15. Orlowski, Lucjan T., 2001. "From inflation targeting to the euro-peg: A model of monetary convergence for transition economies," Economic Systems, Elsevier, vol. 25(3), pages 233-251, September.
  16. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  17. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  18. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  19. 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.
  20. Frankel, Jeffrey A. & Rose, Andrew K., 1997. "Is EMU more justifiable ex post than ex ante?," European Economic Review, Elsevier, vol. 41(3-5), pages 753-760, April.
  21. Lucio Vinhas de Souza & Holger van Eden & Albert de Groot & Gerbert Romijn & Elisabeth Ledrut, 2001. "EMU and Enlargement: A Review of Policy Issues," Macroeconomics 0012019, EconWPA.
  22. Jens Hölscher & Lúcio Vinhas de Souza, 2001. "Exchange rate strategies of new EU entrants," Chapters, in: European Monetary Integration, chapter 9 Edward Elgar.
  23. Anne Marie Gulde & Juha Kähkönen & Peter 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.
  24. International Monetary Fund, 2001. "Labor Markets in Hard-Peg Accession Countries: The Baltics and Bulgaria," IMF Staff Country Reports 01/100, International Monetary Fund.
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