EMU Accession Issues in Baltic Countries

After joining EU, the accession countries are expected to join the EMU and the euro-area. This cannot take place immediately after EU enlargement, as prior joining euro-area the accession countries should apply to the European Commission for entering EMU stage three and fulfil Maastricht convergence criteria’s. There is no deadline, when accession countries should make the decision to join euro-area. However, there is no opt-out clause for accession countries either, like there was for Denmark and UK in 1999. All accession countries are expected to join the monetary union in some stage. This paper analyses briefly the EMU accession issues in Baltic countries. In addition, a formal inspection of the OCA criteria in Baltic countries is carried out, using the structural VAR methodology. The results of Baltic countries are compared with the results of other accession countries and EU countries.Regional Input, Optimum Currency Area, VAR

EMU accession issues in Baltic countries

After joining EU, the accession countries are expected to join the EMU and the euro-area. This cannot take place immediately after EU enlargement, as prior joining euro-area the accession countries should apply to the European Commission for entering EMU stage three and fulfil Maastricht convergence criteria's. There is no deadline, when accession countries should make the decision to join euro-area. However, there is no opt-out clause for accession countries either, like there was for Denmark and UK in 1999. All accession countries are expected to join the monetary union in some stage. This paper analyses briefly the EMU accession issues in Baltic countries. In addition, a formal inspection of the OCA criteria in Baltic countries is carried out, using the structural VAR methodology. The results of Baltic countries are compared with the results of other accession countries and EU countries

The History and Sustainability of the CBA in Estonia

Estonia has had a currency board arrangement (CBA) for more than 10 years. Due to the successful performance of the Estonian economy under a CBA the current position of the Bank of Estonia is to maintain its exchange rate regime until full participation in the EMU, inter alia, during Estonia’s participation in ERM 2. Therefore, it is necessary to analyse the reasons for maintaining the CBA in the past and whether it is a viable option in the future. The main aim of this paper is therefore to give an overview of the history of the Estonian CBA and examine the different aspects of its sustainability. In section 2 the article describes the basic features of the CBA in general and the Estonian CBA in particular and discusses the rationale for the choice of a CBA in Estonia. The third section of the article describes the main developments of the Estonian economy during the last 10 years. Both financial sector and real sector developments are briefly discussed. In the fourth section, we assess the sustainability of the Estonian CBA. We specifically analyze whether the preconditions for the successful performance of the CBA are in place. First, we examine the fiscal policy stance after the introduction of the currency board with special emphasis upon the period strongly influenced by external shocks (1997–1999). Secondly, we discuss the flexibility of the real sector of the economy. For this purpose the flexibility of wage setting, movements in the real exchange rate and changes in foreign trade are discussed. Thirdly, we analyse the resilience of the banking sector by looking at its performance during the external shocks experienced during the Asian and Russian crises. The article concludes that the Estonian economy fulfils the main economic preconditions for the sustainability of the CBA – sufficient fiscal discipline, flexibility of the real sector and resilience of the financial sector. Therefore, the CBA could be considered a suitable exchange rate arrangement before Estonia’s entry to the third stage of the EMU.Estonia; Currency Board

Monetary Transmission Mechanism in Estonia - Some Theoretical Considerations and Stylized Aspects

The monetary system in Estonia is based on the currency board arrangement with German Mark. The strong commitments and rule-based features of currency board imply that there is no active monetary policy in Estonia – all necessarily monetary djustments are left to the market forces. Under fixed exchange rate and free capital mobility Estonian monetary conditions are therefore closely linked with monetary policy in Europe – in addition to the changes in Estonian risk-premium, interest rate developments in Europe can directly influence Estonian interest rates. Those monetary signals transmit widely into Estonian financial sector and ultimately into Estonian real sector through various channels. The interest rate and credit channel have gained special attention in this paper.CBA, MTM, Monetary Policy Transmission, Estonia, Currency Board

Monetary transmission mechanism in Estonia - some theorethical considerations and stylized aspects

The monetary system in Estonia is based on the currency board arrangement. The strong commitments and rule-based features of currency board imply that there is no active monetary policy in Estonia - all necessarily monetary adjustments are left to the market forces. Under fixed exchange rate and free capital mobility Estonian monetary conditions are therefore closely linked with monetary policy in Europe - in addition to the changes in Estonian risk-premium, interest rate developments in Europe can directly influence Estonian interest rates. Those monetary signals transmit widely into Estonian financial sector and ultimately into Estonian real sector through various channels. Some theoretical and intuitive aspects that can affect this process in Estonia have gained special attention in this paper.