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The Optimal Euro Conversion Rate in a Stochastic Dynamic General Equilibrium Model

Author

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  • Balázs Világi

    () (Magyar Nemzeti Bank)

Abstract

This paper, using a stochastic dynamic general equilibrium framework, considers how a small open EMU accession country should choose its Euro conversion rate. In this model a monetary union is interpreted as a perfectly credible infinite nominal exchange rate peg, and an algorithm is provided which maps the vector of accession date values of the state and the exogenous variables to a certain size of nominal exchange rate devaluation or revaluation. It is shown that it is not enough to base the decision on exclusively one factor, namely, the real exchange rate misalignment, although this has a primary role in the determination of the optimal conversion rate. Beyond the real exchange rate, the inflation rate, the real and the nominal wage level, the state of the foreign business cycle, as well as foreign price levels and productivity are the most important additional factors necessary for finding the optimal solution.

Suggested Citation

  • Balázs Világi, 2003. "The Optimal Euro Conversion Rate in a Stochastic Dynamic General Equilibrium Model," MNB Working Papers 2003/11, Magyar Nemzeti Bank (Central Bank of Hungary).
  • Handle: RePEc:mnb:wpaper:2003/11
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    File URL: http://www.mnb.hu/letoltes/wp2003-11vv.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimal monetary policy; small open economy; equilibrium real exchange rate.;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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