Maastricht and the Choice of Exchange Rate Regime in Transition Countries During The Run-Up to EMU

This paper raises some specific issues concerning the choice of exchange rate regime in transition countries during the run-up to EU/EMU membership. It argues that there is no “one-size-fits-all” exchange rate regime that accession countries should uniformly adopt. It also argues that the Maastricht criterion on inflation is inconsistent with the catching-up process because of the Balassa-Samuelson effect and that this inconsistency will encourage a “weighing-in” syndrome: like the boxer who refrains from eating for hours prior to the weigh-in only to consume a big meal once the weigh-in is over, the candidate country will maintain very tight monetary policy and resort to all sorts of techniques (freezing of administered prices, lowering of consumption taxes, etc.) to squeeze down inflation prior to accession only to shift back gears after it has joined the EMU. Indeed, the convergence of short-term interest rates to EMU levels that will come with accession will automatically mean a loosening of monetary policy after the country has become a member of the monetary union. That loosening will be reinforced if the country had previously allowed its exchange rate to appreciate against the euro. The result of this stop-go cycle is that the efficiency of economic management will suffer. It would be better to recognize the principle of the Balassa-Samuelson effect explicitly in the Maastricht criteria by giving more room for maneuver than the one provided by the present rule. The paper makes suggestions on how the Maastricht criterion on inflation could be adjusted and discusses their merits. It concludes that a reasonable compromise would be to define the permissible inflation deviation in reference to the average inflation rate of the euro zone, not the three EU members with the lowest inflation rate.

Banking Sector Reform in Hungary: Lessons Learned, Current Trends and Prospects

This paper reviews the reform of and current trends in the Hungarian banking system and draws some lessons that can be useful for countries where the reforms are less advanced. The point is made in the paper that since the weak financial position of state enterprises has been one of the major sources of difficulties encountered by the banks in transition economies, it is crucial that the restructuring of the banks and enterprises go hand in hand. One lesson learned is that consolidation should be based on an accurate assessment of the difficulties of the banks to reduce the cost of consolidation and should be accompanied by a strengthening of regulation and supervision to prevent the reproduction of losses. The paper also discusses the reasons for the low depth of financial intermediation in Hungary and concludes that this situation will change only slowly.

The Stability and Growth Pact from the Perspective Of the New Member States

The purpose of this paper is to examine the fiscal characteristics of the new members in the light of the requirements of the SGP and the criticisms levelled against the Pact and to see in what ways their initial conditions differ from those faced by the current euro zone countries in the run-up to the adoption of the euro. Overall, because of the lower debt levels and greater yield convergence already achieved, the new members will be able to rely less on gains from yield convergence than the current euro zone members were able to do. EU accession will also have a negative net impact on the budgets of the new members in the early years of membership. We also look at the cyclical sensitivities of the budgets and find that in the new members the smoothing capacity of the automatic stabilizers might be weaker than in the current euro zone members. Beyond these general characteristics, we also emphasize that there are large differences in the starting fiscal positions of the new members. Some of the policy implications of our findings are discussed.http://deepblue.lib.umich.edu/bitstream/2027.42/40095/3/wp709.pd

The Stability and Growth Pact from the Perspective Of the New Member States

The purpose of this paper is to examine the fiscal characteristics of the new members in the light of the requirements of the SGP and the criticisms levelled against the Pact and to see in what ways their initial conditions differ from those faced by the current euro zone countries in the run-up to the adoption of the euro. Overall, because of the lower debt levels and greater yield convergence already achieved, the new members will be able to rely less on gains from yield convergence than the current euro zone members were able to do. EU accession will also have a negative net impact on the budgets of the new members in the early years of membership. We also look at the cyclical sensitivities of the budgets and find that in the new members the smoothing capacity of the automatic stabilizers might be weaker than in the current euro zone members. Beyond these general characteristics, we also emphasize that there are large differences in the starting fiscal positions of the new members. Some of the policy implications of our findings are discussed.EU enlargement, fiscal policy, fiscal rules, Stability and Growth Pact

The Stability and Growth Pact from the Perspective of the New Member States

The purpose of this paper is to examine the fiscal characteristics of the new members in the light of the requirements of the SGP and the criticisms levelled against the Pact and to see in what ways their initial conditions differ from those faced by the current euro zone countries in the run-up to EMU. Overall, because of the lower debt levels and greater yield convergence already achieved, the new members will be able to rely less on gains from yield convergence than the current eurozone members were able to do in the run-up to EMU. EU accession will also have a negative net impact on the budgets of the new members in the early years of membership. We also look at the cyclical sensitivities of the budgets and find that in the new members the smoothing capacity of the automatic stabilizers might be weaker than in the current euro zone members. Beyond these general characteristics, we also emphasize that there are large differences in the starting fiscal positions of the new members. Some of the policy implications of our findings are discussed.EU enlargement, fiscal policy, fiscal rules, Stability and Growth Pact.

Financial Contagion under Different Exchange Rate Regimes

This paper reviews the contagion effects of the global financial crises of 1997-99 on five small open economies: the Czech Republic, Greece, Hungary, Israel and Poland. We analyze how the financial markets of these countries were effected under different exchange rate regimes. We look at the impact on exchange rates, interest rates and stock markets. In order to shed some light on the behavior of financial asset holders at times of global crises, we examine the sources of capital flows in Hungary for which country we were able to gather the detailed data necessary for such an analysis. Based on our findings, we offer some concluding remarks regarding the choice of exchange rate regime and the role of capital controls.

Business Cycle Synchronisation in the Enlarged EU: Comovements in the New and Old Members

It is generally recognized that countries wanting to join a monetary union should display the optimal currency area properties. One such property is the similarity of business cycles. We therefore undertook to analyze the synchronization of business cycles between the EMU and eight new EU members from Central and Eastern European countries (CEECs), for which the next step to be considered in the integration process is entry into the EMU. In contrast to the usually analyzed GDP and industrial production data, we extend our analysis to the major expenditure and sectoral components of GDP and use several measures of synchronization. The main findings of the paper are that Hungary, Poland and Slovenia have achieved a high degree of synchronization with the EMU for GDP, industrial production and exports, but not for consumption and services. The other CEECs have achieved less or no synchronization. There has been a significant increase in the synchronization of GDP and also its major components in the EMU members since the start of the run-up to EMU. While this lends support for the existence of OCA endogeneity, it can not be unambiguously attributed to it because there is also evidence of a world business cycle. Another finding is that the consumption-correlation puzzle remains, but its magnitude has greatly diminished in the EMU members, which is good news for common monetary policy.business cycle synchronization, consumption-correlation puzzle, EMU, new EU members, OCA endogeneity.

Fiscal Divergence and Business Cycle Synchronization: Irresponsibility is Idiosyncratic

Using a panel of 21 OECD countries and 40 years of annual data, we find that countries with similar government budget positions tend to have business cycles that fluctuate more closely. That is, fiscal convergence (in the form of persistently similar ratios of government surplus/deficit to GDP) is systematically associated with more synchronized business cycles. We also find evidence that reduced fiscal deficits increase business cycle synchronization. The Maastricht "convergence criteria," used to determine eligibility for EMU, encouraged fiscal convergence and deficit reduction. They may thus have indirectly moved Europe closer to an optimum currency area, by reducing countries’ abilities to create idiosyncratic fiscal shocks. Our empirical results are economically and statistically significant, and robust

Euro Area Enlargement and Euro Adoption Strategies

The paper discusses the risks and challenges faced by the new members on the road to the euro and the strategies for and timing of euro adoption. We investigate the real-nominal convergence nexus from the perspective of euro area entry. We argue that the initial level of economic development as measured by per capita income and the speed of real convergence have a bearing on the strategies to follow and on the timing of entry into euro area. This is because the lower is the per capita income, the larger is the price level gap to close and the greater is the danger of credit booms and overheating. We argue that inflation targeting with floating rates is better suited than hard pegs to manage the price level catching-up process. We suggest a modification in the Maastricht inflation criterion which as currently defined has lost its economic logic

Experience with inflation targeting in Hungary

I would like to recall to start with some of the basic principles regarding to the purpose and conduct of monetary policy which, while fully accepted by the profession, are perhaps less familiar to the general public