Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/39592
Authors: 
Orlowski, Lucjan T.
Year of Publication: 
2004
Series/Report no.: 
ZEI working paper B 25-2004
Abstract: 
This paper proposes a new monetary policy framework for effectively navigating the path to adopting the euro. The proposed policy is based on relative inflation forecast targeting and incorporates an ancillary target of declining exchange rate risk, which is suggested as a key criterion for evaluating the currency stability. A model linking exchange rate volatility to differentials over the euro zone in both inflation (target variable) and interest rate (instrument variable) is proposed. The model is empirically tested for the Czech Republic, Poland and Hungary, the selected new Member States of the EU that use direct inflation targeting to guide their monetary policies. The empirical methodology is based on the TARCH(p,q,r)-M model.
Subjects: 
exchange rate risk
inflation targeting
monetary convergence
euro area
new EU Member States
JEL: 
E42
E52
F36
P24
Document Type: 
Working Paper

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