The Admission of Accession Countries to an Enlarged Monetary Union: A Tentative Assessment
49 Pages Posted: 31 May 2003
Date Written: February 2003
The enlargement of the European monetary union to include the accession countries (ACs) will not lead to higher average inflation in the enlarged euro area, but only to inflation redistribution across countries if continuity of the monetary policy framework is preserved. In the short term, unanticipated shocks to the real exchange rate may instead affect aggregate inflation if member countries' economic structure differs. The theoretical model is then applied to ten ACs. The numerical results indicate that the implications for the euro area are significant only if we assume a strong real exchange rate appreciation and if ACs are weighted in terms of purchasing power parity standards. In the event of real exchange rate or country-specific supply shocks in ACs, the consequences would be limited for both the current and the enlarged euro area, but sizeable for ACs themselves.
Keywords: Accession Countries, Balassa-Samuelson Effect, European Monetary Union, Exchange Rate Regimes, Monetary Policy
JEL Classification: E52, E58, F33, F40
Suggested Citation: Suggested Citation