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Title:Options for the exchange rate policies in the EU accession countries (and other emerging market economies) PDF Logo
Authors:Bofinger, Peter
Wollmershäuser, Timo
Issue Date:2000
Series/Report no.:Würzburg economic papers 13
Abstract:We develop an institutional framework for central banks that try to pursue a stability-oriented monetary policy with the strategy of exchange rate targeting. Recent experience shows that a crucial element of this approach is to avoid destabilising capital inflows. Policy makers can exert monetary pressure by two different but interrelated channels: the interest rate and the exchange rate. We introduce an open-economy Taylor rule which determines the domestic interest rate of a central bank targeting a depreciation of its exchange rate. The interrelation of the two channels is taken into account by a risk premium adjusted uncovered interest parity condition. In our view sustained violations of this constraint provide an important explanation for the problem of speculative capital inflows. We distinguish between two basically different types of pegs: fixed nominal exchange rate targets and flexible nominal exchange rate targets. With the lessons that we draw from the past experiences of these regimes in Asia, Latin America, Eastern and Central Europe and the ERM I, we develop a framework for the exchange rate strategies of the accession countries during their path towards EMU entry.
Subjects:EU accession countries
monetary integration
emerging market economies
flexible nominal exchange rate target
open-economy Taylor rule
UIP
risk premium
monetary conditions index
capital flows
JEL:E42
F33
F36
F41
Document Type:Working Paper
Appears in Collections:W.E.P. - Würzburg Economic Papers, Lst. f. VWL, Geld u. internat. Wirtschaftsbeziehungen, Universität Würzburg

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