Asymmetric Fluctuation Bands in the Erm and Erm Ii: Lessons and Challenges for New EU Member States of Central and Eastern Europe

Eastern European Economics, Vol. 43, No. 1, pp. 81-114

Posted: 4 May 2005

See all articles by Balázs Égert

Balázs Égert

Organization for Economic Co-Operation and Development (OECD); CESifo (Center for Economic Studies and Ifo Institute); Université Paris X Nanterre - Department of Economics; William Davidson Institute

Rafaƚ Kierzenkowski

Université Paris IX Dauphine

Thomas Reininger

Österreichische Nationalbank

Abstract

The enlargement of the European Union raises a series of questions related to new member states' entry to the EU's exchange rate mechanism II (ERM II) and their subsequent adoption of the euro. This paper considers how to determine the best initial central parity for new EU member states from Central and Eastern Europe toward entering ERM II. This is followed by a discussion of the asymmetric nature of the fluctuation bands around a central parity that could be deemed as compatible with the Maastricht criterion on exchange rate stability, i.e., within the officially announced +/-15 percent fluctuation margins, at about +2.25 percent on the weaker side, with significantly more scope for appreciation on the stronger side. Thereby, the practices of the European Monetary Institute/European Central Bank and the European Commission are compared when assessing the Maastricht criterion. With this as a background, a hypothetical ERM II is constructed for four new EU member states with flexible exchange rate regimes, namely the Czech Republic, Hungary, Poland, and Slovakia, to assess, ex post, the hypothetical fulfillment of the Maastricht criterion by these countries. Based on such an examination, fulfilling the criterion may prove a tricky task, which, inter alia, suggests the need for the careful selection of an appropriate initial ERM II central rate.

Keywords: Exchange rate, exchange rate mechanism, ERM, EU enlargement, asymmetric band, Maastricht criteria, exchange rate stability

JEL Classification: E31, F31, O11, P17

Suggested Citation

Egert, Balazs and Kierzenkowski, Rafaƚ and Reininger, Thomas, Asymmetric Fluctuation Bands in the Erm and Erm Ii: Lessons and Challenges for New EU Member States of Central and Eastern Europe. Eastern European Economics, Vol. 43, No. 1, pp. 81-114, Available at SSRN: https://ssrn.com/abstract=713202

Balazs Egert (Contact Author)

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Université Paris X Nanterre - Department of Economics

Nanterre Cedex, 92001
France

William Davidson Institute

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

Rafaƚ Kierzenkowski

Université Paris IX Dauphine ( email )

Place du Marchal De Lattre de Tassigny
75775 Paris
France
+33 1 44 05 49 47 (Phone)
+33 1 44 05 40 98 (Fax)

Thomas Reininger

Österreichische Nationalbank ( email )

Wien 9, Otto Wagner Platz
Postfach 61
A-1011 Wien, 1090
Austria

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