CASE Center for Social & Economic Research Studies and Analyses Working Paper No. 294
20 Pages Posted: 7 Apr 2005
Date Written: March 2005
This study reviews monetary policy options that are seemingly viable for adopting the euro by the new Member States of the European Union. A fully autonomous direct inflation targeting is believed to be suboptimal for convergence to the euro as it does not incorporate convergence parameters into the central bank reaction function and instrument rules. In an attempt to correct for such deficiency, this study advocates adopting a framework of relative inflation forecast targeting where a differential between the domestic and the eurozone inflation forecasts becomes the main objective of the central bank's decisions. At the same time, some attention to the exchange rate stability objective becomes necessary for facilitating the monetary convergence process. Foreign exchange market interventions, rather than interest rate adjustments, are viewed as a preferred way of achieving this objective.
Keywords: monetary convergence, euro adoption, ERM II, new Member States
JEL Classification: E58, E61, F33, P24
Suggested Citation: Suggested Citation
Orlowski, Lucjan T., Monetary Policy Adjustments on the Final Passage Towards the Euro (March 2005). CASE Center for Social & Economic Research Studies and Analyses Working Paper No. 294. Available at SSRN: https://ssrn.com/abstract=694524 or http://dx.doi.org/10.2139/ssrn.694524