Money Rules for Monetary Convergence to the Euro

Abstract:     
This study examines feasibility of adopting money growth rules as indicator variables of monetary policies for the countries converging to a common currency system, in particular, to the euro. The analytical framework assumes inflation target as the ultimate policy goal. The converging countries act as "takers" of inflation target, in this case, the eurozone's inflation forecast. The study advances a forward-looking money growth model that might be applied to aid monetary convergence to the euro. However, feasibility of adopting money growth rules depends on stable relationships between money and target variables, which are low inflation and stable exchange rate. Long-run interactions between these variables are examined for Poland, Hungary and the Czech Republic by employing the Johansen cointegration test, along with short-run effects assessed with a vector error correction procedure.

Keywords: Common currency system, euro, monetary convergence, money growth rules, inflation targeting

JEL Classification: E42, E52, F36, P24

Accepted Paper Series