Central Banking and the Choice of Currency Regime in Accession Countries

The subject matter of this paper is the design of appropriate Central Banking arrangements and exchange rate regimes for those former centrally planned Central and East European countries that are candidates for full membership in the European Union. We give an overview of the existing arrangements and point out to which extent monetary arrangements are restricted by conditions for entry both into the European Union and eventually into the European Monetary Union. Furthermore we investigate to which degree countries are fulfilling the accession criteria and compare their performance with the performance of earlier EU joiners like the countries of the Iberian Peninsula, Ireland and Greece.

Anchor, float or abandon ship: Exchange rate regimes for the acceccion countries

This paper investigates the appropriate exchange rate regimes, both prior to and following European Union accession, for those former centrally planned Central and Eastern European countries that are currently candidates for full membership in the European Union (1). The exchange rate regime is a key determinant of a countrys macroeconomic stability, which is in turn a key determinant of the investment climate. The choice of exchange rate regime is therefore of great relevance to all who are interested in the transition process. It now seems likely that as many as eight out of the ten candidate countries from the EBRDs region of operations will become EU members by early 2004, in time to participate in the EU Parliamentary elections of June 2004. Further delays beyond 2004 are, however, certainly possible, as enlargement has effectively become contingent on the success of internal reforms in the EU. Inadequate reforms of European institutions may also pose obstacles to successful EU candidates that wish to join European Monetary Union (EMU) at an early date. The body making monetary policy in the European Central Bank (ECB) is the Governing Council. It currently has 18 members - six Executive Board members and 12 national central bank governors, one for each of the 12 EMU member countries. Formally, all 18 members have equal weight in the decision making process. Eighteen members are already too many from the point of view of effective discussion, deliberation and collective decision-making. Enlarging an unreformed European Central Bank (ECB) to include ten new members would turn the current 18 member ECB Governing Council into an unwieldy, indeed unmanageable group (2)

Contrasting different forms of price stickiness: an analysis of exchange rate overshooting and the beggar thy neighbour policy

This paper considers a two country economy similar to that in Obstfeld and Rogoff (1995). We build on their model by distinguishing between sticky retail prices, sticky wholesale prices and sticky ages. We find that conclusions about whether monetary shocks lead to exchange rate overshooting and spillovers on foreign production and consumption depend crucially on the form of price stickiness assumed in the economy. Sticky retail prices not only allow for a profitable 'Beggar Thy Neighbour Policy' but also lead to exchange rate overshooting. Although the outcome is similar to the seminar work by Dornbusch (1976), the driving force in our model is quite different. With sticky retail prices, the exchange rate overshoots even though the interest rate parity may not even hold in equilibrium. These results are in sharp contrast to the outcomes under the sticky wholesale prices scenario wherein prices are fixed in the producers' currency. Contrary to the spirit of the 'Beggar Thy Neighbour Policy', an unexpected money expansion benefits inhabitants in the other country as well. The interest rate parity always holds in equilibrium and there is no exchange rate overshooting

An analysis of causes and welfare effects of real exchange rate movements.

This thesis contributes to the research on determinants and welfare effects of real exchange rate movements. Chapters two to four focus on a discussion of money supply shocks as one of the sources of changes in the real exchange rate. More specifically chapter two contains a critical overview of empirical and theoretical research that contributes to our understanding of the monetary transmission mechanism in open economies. The chapter analyses two specific classes of models, liquidity models and sticky price models and investigates to which degree these models are able to rationalise the result of related empirical studies. The third chapter focuses on the determinants of the welfare effects of money supply shocks across countries if prices are sticky. It analyses specifically the implications of different forms of price stickiness. Furthermore it combines these nominal rigidities with different real imperfections in the labour market. The chapter concludes that the impact of a money supply shock on real exchange rates and the welfare effect at home and abroad depend strongly on the type of nominal rigidity assumed. The fourth chapter analyses the effect of a money supply shock on tradable and nontradable producers inside a country and shows that the widespread belief that tradable sectors benefit the most from a depreciation of the exchange rate could be misplaced. It stresses the importance of sectoral labour mobility and risk sharing in an evaluation of relative welfare effects. The fifth chapter discusses the link between structural changes inside economies with the real exchange rate using transition economies as an example. In doing so the chapter abstracts completely from any nominal variables. Instead it argues that the real exchange rate movement in transition countries is at least partly driven by imperfections in the capital markets. The sixth fifth chapter concludes the thesis

The real exchange rate in transition economies

Real exchange rates appear to present a specific behaviour in the early phase of transition: they are largely unaffected by nominal exchange rate movements and exibit trend appreciation. The model presented here describes the transition process as the emergence of two new (traded and non-traded good) sectors and the decline of an inefficient and subsidised state sector. The absence of financial markets means that firms accumulate capital through retained earnings. Labour markets are imperfect giving rise to a wage gap. The model shows that the real exchange rate plays the crucial role of determining real wages. Through real wages it sets the pace for the development of the new sectors as workers are attracted out of the state sector. The link between growth and real appreciation differs from the usual Balassa Samuelson effect. The paper also explores the role of labour market distortions and foreign financing

Banque centrale et choix de régimes de change pour les pays candidats à l’adhésion

Central Banking and the Choice of Currency Regime in Accession Countries This paper deals with the design of appropriate Central Banking arrangements and exchange rate regimes for those CEECs that are candidates for full membership in the EU. We give an overview of the existing arrangements and point out to which extent monetary arrangements are restricted by conditions for entry both into the EU and into the EMU. Furthermore we investigate to which degree countries are fulfilling the accession criteria and compare their performance with the performance of earlier EU joiners. After concluding that the accession criteria do not necessarily favour a particular monetary regime, we analyse the pros and cons of the two regimes widely believed to be most stable - currency boards or inflation targeting. Under either regime tensions are likely to arise from the attempt to meet the accession criteria of a low inflation rate and a stable exchange rate. JEL classifications : E58, F31, P20Cet article étudie les évolutions institutionnelles des Banques centrales ainsi que les régimes de change des pays de l’Est, candidats à l’UE. Nous examinons les régimes actuels et comment ils doivent évoluer afin de respecter les critères d’entrée dans l’UE et l’UEM. De plus, nous étudions avec quel degré les pays candidats satisfont les critères d’accession et nous les comparons aux performances des derniers entrants dans l’UE. Après avoir conclu que les critères d’accession ne favorisent pas nécessairement un régime de change particulier, nous analysons le pour et le contre des deux régimes envisagés comme les plus stables - le currency board et la cible d’inflation. Sous ces deux régimes, le respect des critères de faible inflation et de stabilité des changes est susceptible de produire de fortes tensions. Classification JEL : E58, F31, P20Buiter Willem, Grafe Clemens. Banque centrale et choix de régimes de change pour les pays candidats à l’adhésion. In: Revue d'économie financière. Hors-série, 2001. Dix ans de transition en Europe de l'Est : bilan et perspectives. pp. 315-347

Central Banking and the Choice of Currency Regime in Accession Countries

This paper deals with the design of appropriate Central Banking arrangements and exchange rate regimes for those CEECs that are candidates for full membership in the EU. We give an overview of the existing arrangements and point out to which extent monetary arrangements are restricted by conditions for entry both into the EU and into the EMU. Furthermore we investigate to which degree countries are fulfilling the accession criteria and compare their performance with the performance of earlier EU joiners. After concluding that the accession criteria do not necessarily favour a particular monetary regime, we analyse the pros and cons of the two regimes widely believed to be most stable-currency boards or inflation targeting. Under either regime tensions are likely to arise from the attempt to meet the accession criteria of a low inflation rate and a stable exchange rate. JEL classifications : E58, F31, P20Banque centrale et choix de régimes de change pour les pays candidats à l’adhésion Cet article étudie les évolutions institutionnelles des Banques centrales ainsi que les régimes de change des pays de l’Est, candidats à l’UE. Nous examinons les régimes actuels et comment ils doivent évoluer afin des respecter les critères d’entrée dans l’UE et l’UEM. De plus, nous étudions avec quel degré les pays candidats satisfont les critères d’accession et nous les comparons aux performances des derniers entrants dans l’UE. Après avoir conclu que les critères d’accession ne favorisent pas nécessairement un régime de change particulier, nous analysons le pour et le contre des deux régimes envisagés comme les plus stables - le currency board et la cible d’inflation. Sous ces deux régimes, le respect des critères de faible inflation et de stabilité des changes est susceptible de produire de fortes tensions. Classification JEL : E58, F31, P20Buiter Willem, Grafe Clemens. Central Banking and the Choice of Currency Regime in Accession Countries . In: Revue d'économie financière (English ed.). Hors-série, 2001. Ten years of transition in Eastern European countries. pp. 287-318

Anchor, float or abandon ship: exchange rate regimes for the accession countries

The paper considers alternative exchange rate regimes for the East European accession candidates, both prior to EU accession and following EU accession but prior to EMU membership. We conclude that, from an economic point of view, EMU membership should be as early as possible. There is, however, a risk that prevailing interpretations of the inflation and exchange rate criteria for EMU membership could lead to unnecessary delays in EMU membership for the accession countries. The exchange rate criterion for EMU membership requires that the candidate “has respected the normal fluctuation margins provided for by the exchange rate mechanism of the European Monetary System without severe tensions for at least the last two years before the examination.” Both this text and the precedents of Finland, Italy and Greece, support the view that the exchange rate criterion can be satisfied without two years of formal ERMII membership. Insistence on at least two years of formal ERMII membership for the accession countries, would result in an unnecessary, costly and potentially risky stay in EMU purgatory