Maastricht & the Choice of Exchange Rate Regime in Transition Countries during the Run-Up to EMU. ENEPRI Working Paper No. 6, May 2001
(2001) Maastricht & the Choice of Exchange Rate Regime in Transition Countries during the Run-Up to EMU. ENEPRI Working Paper No. 6, May 2001.
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Abstract
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.
| Item Type: | Working Paper |
|---|---|
| Remote Resource Image: |  |
| Public Domain: | No |
| Refereed: | No |
| Status: | Published |
| Authors, Individual: | Szapáry, György. |
| Title: | Maastricht & the Choice of Exchange Rate Regime in Transition Countries during the Run-Up to EMU. ENEPRI Working Paper No. 6, May 2001 |
| Language: | English |
| Institution: | Centre for European Policy Studies, Brussels |
| Journals and Series: | Series > Centre for European Policy Studies (Brussels) > ENEPRI Working Papers |
| Pages: | 22 |
| Month: | May |
| Year: | 2001 |
| Subjects: | EU policies and themes > External relations > EU-South-Eastern Europe (Balkans) EU policies and themes > External relations > EU-Baltics Countries > Cyprus EU policies and themes > External relations > EU-Central and Eastern Europe Countries > Malta EU policies and themes > Treaty reform > enlargement EU policies and themes > Policies & related activities > economic and financial affairs > EMU/EMS/euro |
| ID Code: | 1862 |
| Deposited By: | Wilkin, Phil |
| Deposited On: | 08 July 2004 |
