The Relevance of Inflation and Exchange Rate Risk for Monetary Convergence to the Eurozone
Lucjan T. Orlowski
Sacred Heart University - John F. Welch College of Business
Journal of Emerging Markets, Vol. 8, No 2, pp. 5-15, Summer 2003
This study places a strong emphasis on the ability of Central European countries to lower inflation and exchange rate risk premiums on their path of monetary convergence to the eurozone. A model of the nexus between both risk premiums is presented along with the recent evidence supporting well-coordinated interactions between these risk premiums for Poland, Hungary and the Czech Republic. The analysis implies that monetary policies based on direct inflation targeting are likely to contain these risk premiums in the candidate countries and can be effectively used during the remaining period of their preparations for entering the euro area.
Keywords: Inflation risk premium, exchange rate risk premium, common currency area, inflation targeting, transition economies
JEL Classification: E32, E52, P33Accepted Paper Series
Date posted: February 8, 2005
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