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Emu II a. Exchange rates and accession


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EMU II

A. Exchange rates and accession




Introduction





  • The importance of exchange rate regime

  • No Treaty obligations in pre-accession concerning exchange rates

  • After accession, join the ERM II

Currency Board Arrangements




  • What is a CBA?

  • Is a CBA appropriate to foster convergence?

  • Irish experience

Three conditions for implementation of a CBA in an open economy





Achievements in Bulgaria, Estonia, and Lithuania, under a CBA





  • Reduction in inflation

  • Macroeconomic stabilization

  • Relatively high level of growth

  • Caution: there may be other determinants of growth, besides CBA

Advantages of ERM II





  • Possibility of adjusting to the market equilibrium exchange rate

  • Monetary policy remains effective

  • Movement of the nominal exchange rate could absorb part of the real appreciation linked to higher inflation

Reasons for keeping the CBA within the ERM II until the final adoption of the euro




Adopting the euro before accession? (Euroisation)




  • Dollarization in Panama and Puerto Rico increased stability



  • Euroisation: use the euro; complete freedom of capital movements; strong banking system



  • Kosovo and Montenegro: first the DM, then the euro



  • Euroisation is incompatible with the Treaty

B. The process of accession to EMU


Pre-accession to EMU




  • CEECs need to concentrate first on market integration



  • Strict focus on early adoption of the euro may hinder growth



  • Premature adoption of the euro by the CEECs may negatively affect the Euro zone





Potential incompatibilities with ERM II









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