Currency boards in the EU accession process

Abstract

In 2002, fourteen countries were candidates for accession to the EU. A large number of them were ex-socialist countries. The Treaty on Monetary Union (1992) imposed several criteria as conditions for accession to the Monetary Union, independent from the EU accession. The “Euro accession” essentially required compliance with budget, debt and inflation performances close to that encountered in the Euro zone. On the exchange rate side it imposes a period of nominal fixity just before the accession. The main question we want to address in this article is: have currency boards been an efficient tool to support convergence of inflation performances towards Euro zone performances, in comparison to other exchange rate and monetary strategies? Our assumption is that, because the currency boards create a quasi-monetary union, they are an efficient convergence medium. In order to provide evidence to support our hypotheses, we test a restricted co-integration model aiming at a long-run equalisation between local and German prices. The long-run relation facilitates the evaluation of the inertia of the price differential between candidate countries and Germany. In addition, the short-term dynamics provide some evidence regarding the strength of the convergence toward the specified long-run relation.Lithuania, Estonia, Bulgaria, panel unit root tests, price convergence, EU accession, transition, Currency Boards