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Monetary Policy Adjustments on the Final Passage towards the Euro


Lucjan T. Orlowski


Sacred Heart University - John F. Welch College of Business

July 31, 2009

CASE Network Studies and Analyses No. 294

Abstract:     
This study reviews monetary policy options that are seemingly viable for adopting the euro by the new Member States of the European Union. A fully autonomous direct inflation targeting is believed to be suboptimal for convergence to the euro as it does not incorporate convergence parameters into the central bank reaction function and instrument rules. In an attempt to correct for such deficiency, this study advocates adopting a framework of relative inflation forecast targeting where a differential between the domestic and the eurozone inflation forecasts becomes the main objective of the central bank's decisions.

At the same time, some attention to the exchange rate stability objective becomes necessary for facilitating the monetary convergence process. Foreign exchange market interventions, rather than interest rate adjustments, are viewed as a preferred way of achieving this objective.

Number of Pages in PDF File: 20

Keywords: monetary convergence, euro adoption, ERM II, new Member States

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Date posted: August 2, 2009 ; Last revised: February 9, 2010

Suggested Citation

Orlowski, Lucjan T., Monetary Policy Adjustments on the Final Passage towards the Euro (July 31, 2009). CASE Network Studies and Analyses No. 294. Available at SSRN: http://ssrn.com/abstract=1441907 or http://dx.doi.org/10.2139/ssrn.1441907

Contact Information

Lucjan T. Orlowski (Contact Author)
Sacred Heart University - John F. Welch College of Business ( email )
5151 Park Avenue
Fairfield, CT 06825
United States
203-371-7858 (Phone)
HOME PAGE: http://www.sacredheart.edu/ltorlowski.cfm
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