Monetary Convergence of the EU Accession Countries to the Eurozone: A Theoretical Framework and Policy Implications
Lucjan T. Orlowski
Sacred Heart University - John F. Welch College of Business; Halle Institute for Economic Research; Centre for Social and Economic Research (CASE)
Journal of Banking and Finance Vol. 29, No. 1, pp. 203-225, January 2005
A flexible approach to direct inflation targeting offers the European Union accession countries a viable monetary policy choice that is believed to facilitate both the economic transition and the monetary convergence to the eurozone. Following this assumption, a model investigating the nexus between inflation and selected monetary variables in three EU accession countries: the Czech Republic, Poland and Hungary is advanced. The empirical analysis is aimed at explaining the sensitivity of the CPI-based inflation path in these countries to backward- as well as forward-looking expectations, nominal exchange rate fluctuations, the eurozone inflation impulses, and output changes. The analysis implies that the monetary convergence begins with flexible inflation targeting and concludes with a full-fledged euroization.
Keywords: European Union accession, inflation targeting, monetary convergence
JEL Classification: E42, E52, F36, P24Accepted Paper Series
Date posted: February 8, 2005
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