Implications of EMU for Exchange Rate Policy in Central and Eastern Europe

IMF Working Papers, January 1, 1999

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Implications of EMU for Exchange Rate Policy in Central and Eastern Europe

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Bibliographic details

• Authors: George Kopits
• Published: January 1, 1999
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451842579.001

Summary

• Examines the desirability for, and the ability of, the lead candidates in Central and Eastern Europe to participate in the new exchange rate mechanism (ERM2) and eventually in EMU in view of the requirements of Stage 2 of European Monetary Union (EMU) for accession to the European Union.
• Concludes that for most of these countries the benefits are likely to outweigh the cost of participation.
• Recommends that after successfully meeting the basic conditions for ERM2 (wage flexibility, prudent fiscal and monetary stance, financial system soundness), each candidate should be able to shadow the euro, with sufficient flexibility around the central rate, prior to formal participation.
• Paper concludes with a discussion of two policy dilemmas.

Major findings and analysis

• Participation in ERM2 is generally desirable for lead candidates in Central and Eastern Europe because benefits are likely to outweigh costs.
• Preconditions identified for successful ERM2 participation:
  • Wage flexibility
  • Prudent fiscal stance
  • Prudent monetary stance
  • Financial system soundness
• Recommended interim strategy: shadow the euro with sufficient flexibility around the central rate prior to formal participation in ERM2/EMU.
• Discusses two policy dilemmas (noted without detail on this page).

Subjects and keywords

• Subject: Currencies, Exchange rate arrangements, Exchange rate policy, Exchange rates, Financial services, Fiscal stance, Foreign exchange, Money, Short term interest rates
• Keywords: Asia and Pacific, Central and Eastern Europe, crawling peg, Currencies, current account, Eastern Europe, Europe, Exchange rate arrangements, Exchange rate policy, Exchange rates, hard currency, international monetary arrangements, lead accession countries, managed float, nominal rate, risk premium, Short term interest rates, Southeast Asia, stabilization program, transition economies, WP

Content in this bundle

• Implications of EMU for Exchange Rate Policy in Central and Eastern Europe - WP/99/09
  • Implications of EMU for Exchange Rate Policy in Central and Eastern Europe - WP/99/09 (Markdown version)
  • Implications of EMU for Exchange Rate Policy in Central and Eastern Europe - WP/99/09 (PDF)