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Financial integration, exchange rate regimes in CEECs, and joining the EMU: Just do it..

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Abstract
Candidate countries of central and eastern Europe (CEECs) are suppose to join the EU in 2004, June, which imply that they will face important challenges in the conduct of macroeconomic policy, in order to be able to enter the ERM-II system and eventually enter the EMU (European Monetary Union). Abandoning an independent monetary policy might entail significant costs for countries, which have succeeded in recovering and are in a process of catching-up. However those costs have probably been exaggerated, and their estimation biased by the traditional optimal currency area criteria. The main criticism against a too strong emphasis on the latter rests on two arguments. The first one is that assessing the trade-off for joining the EMU does not deliver the same conclusion ex ante and ex post. Meanwhile, the degree of financial integration will likely increase dramatically, which in turns will decrease the opportunity cost of loosing the monetary policy for absorbing country specific shocks. In a world of capital mobility, the room left for an independent monetary policy is very narrow, maybe close to zero in small, emerging countries, more vulnerable to speculative attacks than countries in the core. The second argument is more empirical. While the link between the exchange rate regime and the fundamentals is rather weak, the political agenda of joining the EU and subsequently the EMU seems to explain the choice of the exchange rate regime

Suggested Citation

  • Maurel Mathilde, 2004. "Financial integration, exchange rate regimes in CEECs, and joining the EMU: Just do it..," Cahiers de la Maison des Sciences Economiques j04027a, Université Panthéon-Sorbonne (Paris 1).
    • Handle: RePEc:mse:wpsorb:j04027a
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    File URL: http://mse.univ-paris1.fr/pub/mse/cahiers2004/J04027.pdf
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    Cited by:

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    3. Babetskii, Ian & Boone, Laurence & Maurel, Mathilde, 2004. "Exchange rate regimes and shocks asymmetry: the case of the accession countries," Journal of Comparative Economics, Elsevier, vol. 32(2), pages 212-229, June.

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    More about this item

    Keywords

    Exchange rate arrangements; accession to the EMU; EU enlargement; international capital flows;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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