Monetary Convergence of the EU Accession Countries to the Eurozone: A Theoretical Framework and Policy Implications

Abstract:     
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, P24

Accepted Paper Series