Monetary Convergence and Risk Premiums in the EU Candidate Countries
Lucjan T. Orlowski
Sacred Heart University - John F. Welch College of Business
ZEI Working Paper No. B 26 2002
This study examines the link between various monetary policy regimes and the ability to manage inflation and exchange rate risk premiums in the EU candidate countries as they undergo monetary convergence to the eurozone. The underlying hypothesis is that a system of 'flexible inflation targeting' may be an optimal policy choice for managing these two categories of risk. A model of inflation and exchange rate risk premiums within the context of inflation targeting is proposed. Recent trends in these risk premiums in Hungary, the Czech Republic and Poland are tested by using the GARCH (1,1) methodology.
Number of Pages in PDF File: 36
Keywords: Inflation risk premium, exchange rate risk premium, inflation targeting, monetary convergence, transition economies
JEL Classification: E32, E52, P33
Date posted: February 11, 2005
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