Monetary Policy Adjustments on the Final Passage Towards the Euro

CASE Center for Social & Economic Research Studies and Analyses Working Paper No. 294

20 Pages Posted: 7 Apr 2005  

Lucjan T. Orlowski

Sacred Heart University - John F. Welch College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 2005

Abstract

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

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

Lucjan T. Orlowski (Contact Author)

Sacred Heart University - John F. Welch College of Business ( email )

5151 Park Avenue
Fairfield, CT 06825
United States
203-371-7858 (Phone)

HOME PAGE: http://www.sacredheart.edu/ltorlowski.cfm

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