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The Maastricht Convergence Criteria and Monetary Regimes for the EMU Accession Countries

  • Lipinska, Anna

The goal of this paper is to study the ability of different monetary regimes to satisfy the Maastricht criteria. We perform our analysis in the framework of a two-sector small open economy DSGE model with nominal rigidities exposed to both domestic and external shocks. We analyze the regimes that reflect the policy choices observed in the EMU Accession countries, i.e. peg regime, managed float regime and flexible exchange rate regime with CPI inflation targeting. There exists a significant trade-off between compliance with the CPI inflation criterion and the nominal interest rate criterion. The sensitivity analysis reveals that the probabability that some of the regimes will satisfy all the criteria increases with openness of the economy and also degree of substitution between traded goods. Moreover, provided that two previous conditions are satisfied, degree of exchange rate pass through determines which of the regimes can comply with the criteria. Low degree of pass through enables regimes with managed exchange rate to fulfill all the criteria while high degree of pass through implies that the CPI targeting regime satisfies all the criteria.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16375.

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Date of creation: Jun 2008
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Handle: RePEc:pra:mprapa:16375
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  1. De Paoli, Bianca, 2009. "Monetary policy and welfare in a small open economy," Journal of International Economics, Elsevier, vol. 77(1), pages 11-22, February.
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  8. Michael B. Devereux, 2003. "A Macroeconomic Analysis of EU Accession under Alternative Monetary Policies," Journal of Common Market Studies, Wiley Blackwell, vol. 41(5), pages 941-964, December.
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  17. federico ravenna & fabio natalucci, 2003. "the road to adopting the euro: monetary policy and exchange rate regimes in EU candidate countries," Computing in Economics and Finance 2003 227, Society for Computational Economics.
  18. Vasily Astrov, 2005. "Sectoral Productivity, Demand, and Terms of Trade: What Drives the Real Appreciation of the East European Currencies?," wiiw Working Papers 34, The Vienna Institute for International Economic Studies, wiiw.
  19. Fabrizio Coricelli, 2002. "Exchange rate policy during transition to the European Monetary Union: The option of euroization," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 10(2), pages 405-417, July.
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