Monetary policy and EMU enlargement: Issues regarding ERM II and adoption of the euro in Estonia |
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Authors: | Raoul Lättemäe Martti Randveer |
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Institution: | (1) Bank of Estonia, Estonia |
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Abstract: | The aim of the paper is to give an overview of the issues related to Estonia's entry into ERM II. For that purpose the article
describes the official position of the Estonian authorities regarding entry into ERM II and the adoption of the euro, explains
the rationale for early entry into ERM II, and presents the reasons for maintaining the currency board arrangement until full
membership in EMU. Also, the challenges of the adoption of the euro are discussed. The article concludes that early entry
into ERM II is appropriate as the perceived costs—short-term costs of fiscal consolidation and the cost of giving up independent
monetary policy and flexible exchange rates as stabilization tools—are practically non-existent in Estonia. The paper argues
that the high level of exchange rate stability and nominal convergence, relatively high flexibility of the economy, and integration
with the euro area support the rationale for maintaining the currency board arrangement and adopting the euro early. |
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