Monetary Convergence and Risk Premiums in the EU Candidate Countries

Orlowski, Lucjan T.

doi:10.2139/ssrn.665441

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Monetary Convergence and Risk Premiums in the EU Candidate Countries

ZEI Working Paper No. B 26 2002

36 Pages Posted: 11 Feb 2005

See all articles by Lucjan T. Orlowski

Lucjan T. Orlowski

Sacred Heart University - John F. Welch College of Business

Date Written: November 2002

Abstract

This study examines the link between various monetary policy regimes and the ability to manage inflation and exchange rate risk premiums in the EU candidate countries as they undergo monetary convergence to the eurozone. The underlying hypothesis is that a system of 'flexible inflation targeting' may be an optimal policy choice for managing these two categories of risk. A model of inflation and exchange rate risk premiums within the context of inflation targeting is proposed. Recent trends in these risk premiums in Hungary, the Czech Republic and Poland are tested by using the GARCH (1,1) methodology.

Keywords: Inflation risk premium, exchange rate risk premium, inflation targeting, monetary convergence, transition economies

JEL Classification: E32, E52, P33

Suggested Citation: Suggested Citation

Orlowski, Lucjan T., Monetary Convergence and Risk Premiums in the EU Candidate Countries (November 2002). ZEI Working Paper No. B 26 2002, Available at SSRN: https://ssrn.com/abstract=665441 or http://dx.doi.org/10.2139/ssrn.665441