Costs and benefits of unilateral euroization in central eastern Europe

Countries unable or unwilling to join a monetary union can replicate most membership effects unilaterally through either a currency board or the formal replacement of domestic currency by that of the Union. Potential benefits include lower transaction costs, lower interest rates, and lower exposure to speculative attacks. Costs include initial reserves, inadequate response to asymmetric shocks, loss of seigniorage, no lender of last resort. Expected costs and benefits have probably been exaggerated. Net effects depend primarily on the degree of monetary, real, and institutional convergence. Positive net advantages will accrue to countries that are either already converging, or wish to use a single currency to speed up convergence — especially if small. There is no legal or economic justification for EU aversion to unilateral euroization in accession candidate countries. JEL classification: F33, F36, E58, P33.     

Should Estonia euroize?

Estonia has been operating a currency board arrangement tied to the deutschemark, now the euro, since 1992. Optimal currency area considerations, policy orientation and the flexibility of prices and wages in Estonia support a case for monetary union with the eurozone. But the European Union requires Estonia to wait until EU accession and subsequent Eurosystem accession before it can adopt the euro. In the meanwhile, gains expected from euroization — lower and more stable interest rates, lower transactions costs in trade and increased transparency, all of which would promote trade, investments and economic growth — would be forgone. In this context, the paper raises the question, should Estonia go ahead and euroize now? JEL classification: E42, E58, F33.     

The euro for the Balkans?

This paper makes the case for full euroization of the Balkans. It argues that the full adoption of the new currency, including the use of euro notes and coins, would bring important benefits for the countries in south east Europe. The key benefit of euroization would be the opportunity it would provide to radically reform and open the financial system, thus changing the equilibrium of the domestic political economy (by eliminating political influence over credit allocation). It also argues that the loss of seigniorage would be minor, but that there is no reason why the rich EU should benefit from this. Compensation for the loss of seigniorage would be technically easy to implement. Finally, the paper presents a small model that demonstrates how a devaluation might actually impair the debt‐servicing capacity of the government. This implies that the exchange rate cannot easily absorb shocks to the interest rate to be paid on external debt, or to the availability of capital for emerging markets in general. A deterioration in the availability of external capital might thus trigger extremely large exchange rate adjustments, which in turn can disrupt the domestic financial system. This should be an important consideration for such a highly indebted region. JEL classification: F33, F32.     

The transmission of euro area monetary policy to financially euroized countries

This paper provides a comprehensive analysis of the interest rate pass-through of euro area monetary policy to retail rates outside the euro area, contributing to the literature on the consequences of unofficial financial euroization and on the transmission channels of monetary policy spillovers. The results suggest that in the long run, more than the one-third of all euro retail rates in euroized countries of central, eastern, and south-eastern Europe is linked to the euro area shadow rate. Compared with euro area monetary policy, the share of cointegration of the domestic monetary policy rate is on average lower, suggesting that domestic central banks in euroized countries with independent monetary policy can only partially control the “euro part” of the interest rate channel. Furthermore, euro area monetary policy shocks are fast and persistently transmitted into euro retail rates outside the euro area, which constitutes an additional channel of international shock transmission.     

Exchange rate policy during transition to the European Monetary Union: The option of euroization

Countries of central eastern Europe which are candidates for accession to the European Union face fundamental challenges in the conduct of macroeconomic policies. These countries are characterized by growth rates faster than those of EU countries, along with large current account deficits and an equilibrium appreciation of the real exchange rate. In such a context, an early adoption of the euro may be beneficial to central eastern European countries, while the ERM‐II system and the Maastricht criterion on inflation may give rise to serious drawbacks for candidate countries. JEL classification: F15, F41     

THE POLITICAL CHOICE OF THE EXCHANGE RATE REGIME*

The purpose of this paper is to present a model in which the choice of the optimal exchange rate regime is envisaged in a political setting. We consider a country whose voting population comprises three types of agents, importers, exporters and speculators, who select their position on exchange rate policy according to welfare maximization. As a result, well-defined interest groups are shown to emerge. Each coalition makes contributions to one of two political candidates running for political office in support for their optimal policy intervention. When policy pronouncements by the two candidates are made in terms of exchange rate volatility, the equilibrium consists of two extremes: a fixed versus flexible exchange regime, the latter with bounded volatility [JEL D72, F31].     

THE REVELATION OF INFORMATION THROUGH THE ELECTORAL PROCESS: AN EXPLORATORY ANALYSIS*

This paper investigates the incentives for candidates to make informative campaign speeches concerning their policy intentions. Electoral competition is modeled as a game of communication in which candidates’policy preferences are private information and they compete by making pre-electoral policy announcements. An equilibrium is shown to exist in which candidates reveal their true policy intentions. We find that campaign messages are more likely to be informative, the less powerful is the elected office, the more attractive are candidates’opportunities outside of office, and the more uniform are candidates’prior beliefs as to the median voter's preferred policy.     

Assessing independent monetary policy in small, open and euroized countries: evidence from Western Balkan

This article approaches to the optimum currency area from the empirical side by investigating the costs of adoption of a single currency for small, open and euroized Western Balkan countries (WBC). Using several econometric techniques, this study attempts to answer three questions relevant for monetary integration of the WBC and similar transition countries: What are the constraints on an independent monetary policy? What is the need for operating an independent monetary policy? and What is the ability to conduct an independent monetary policy? The constraints on independent monetary policy in most of the WBC at this stage are relatively serious because of high levels of openness and euroization. They limit the ability of the central bank, which is oriented to price stability, to use the nominal exchange rate for achieving other goals (for example, output stabilization). Regarding the second question, the results from structural VAR framework suggest a low synchronization for supply and demand shocks between the WBC and the euro area, indicating potentially high costs of losing independent monetary policy. Furthermore, the results from Kalman filter technique inform that the shock convergence process is slow or absent in the WBC vis-à-vis the euro area. Regarding the last question, the results from cointegration and VAR analysis suggest that the ability to conduct an independent monetary policy, assessed by analyzing the interest rate channel as the most prominent transmission channel in the euro area, is relatively weak in the WBC.     

OPTIMAL SETS OF CANDIDATES

We consider the optimal choice set of candidates standing for elected office. The decision dimensions are in the number of candidates standing for election, the experiential base of the candidates standing for election as measured by the length of prior experience held by the candidates, and the proportion of candidates with such prior experience. We find that while there are benefits that accrue to having a larger choice, the optimal number of candidates is strictly finite. Second, to justify an increase in the optimal length of prior experience requires strong increases in the ratio of benefits that accrue from additional experience to the cost of abuse of privilege. The conditions under which an increase in the length of prior experience can be justified are where the cost associated with abuse of privilege is negligible. This would require the development of appropriate formal (legal and constitutional) and informal (civil society) institutions that ensure that abuse of office remains negligible. Finally, we allow the number of electoral candidates, the length of their prior experience, as well as the proportion of candidates with experience to vary. Under this choice problem optimal pairings of length of experience and the proportion of candidates with prior experience may not exist. Hence, societies may be condemned to suboptimality even should the political system prove to be amenable to change, rendering disaffection endemic to the political system.     

Post–Plaza intervention in the DEM/USD exchange rate

In this paper, whether specific methods of conducting central bank interventions increase the likelihood of achieving its objectives in analysed. Daily Bundesbank and Fed intervention data covering the entire Post–Plaza period are used to estimate binary choice models over the sample of observations when at least one of the two central banks were intervening. The results suggest that central banks can, in fact, improve the likelihood of success primarily through coordination and that unilateral intervention conducted by the Bundesbank appears to have been destabilizing. Furthermore, it is shown that relatively infrequent intervention has a higher likelihood of success. JEL classification: E58, F31, F42, G15
Intervention dans le monde du taux de change dollar/mark après l'Accord de Plaza. Ce mémoire explore la question à savoir si des méthodes spécifiques d'intervention par la banque centrale accroissent la probabilité que les objectifs soient atteints. A l'aide de données sur l'impact des interventions de la Bundesbank et de la Federal Reserve pour toute la période qui a suivi l'Accord de Plaza, on calibre les modèles de choix binaires pour l'échantillon des données quand au moins l'une des deux banques centrales est intervenue. Les résultats suggèrent que les banques centrales peuvent en fait améliorer la probabilité de succès dans la poursuite des objectifs via la collaboration et que les interventions unilatérales de la Bundesbank semblent avoirété déstabilisantes. De plus, il semble que des inteerventions relativement moinsfréquentes ont une plus grande probabilité de succès.     

On the Role of Labour Market Reform for the Enlargement of a Monetary Union

This paper studies the incentives to join a monetary union,and the incentives to reform within a monetary union and withinthe candidate countries, respectively. We present some "ordersof magnitude" evidence on the size and balance of the incentiveeffects for joining and being joined, and on the desirabilityof reform in and out of the existing EMU in Europe. It is foundthat countries will only want to join a monetary union wherethere has been sufficient labour market reform, and where labourmarkets are more flexible than their own. But existing memberswill want the same properties of their new partners as well.(JEL F02, F15, F33, F 42)     

Dynamic Relationships among GCC Stock Markets and Nymex Oil Futures

Daily relationships among stock markets of the Gulf Cooperation Council (GCC) members, excluding Qatar, form two equilibrium relationships with varying predictive power. The Saudi market leads, followed by Bahrain and United Arab Emirates. Kuwait, which is dominated by momentum traders, and Oman have the weakest links with the other GCC markets. Only the Saudi index can predict—and be predicted by—New York Mercantile Exchange oil futures prices. Therefore these markets are candidates for diversified regional portfolios at the country level. The trading day effect is weak for all GCC markets and oil futures prices but remains consistent with findings for the U.S. stock market. (JEL C22 , F3 , Q49 )     

Nonconvergent Electoral Equilibria under Scoring Rules: Beyond Plurality

We use Hotelling's spatial model of competition to investigate the position‐taking behavior of political candidates under a class of electoral systems known as scoring rules, though the model also has a natural interpretation in the firm location context. Candidates choose ideological positions so as to maximize their support in society. Convergent Nash equilibria in which all candidates adopt the same policy were characterized by Cox (1987). Here, we investigate nonconvergent equilibria, where candidates adopt divergent policies. We identify a number of classes of scoring rules exhibiting a range of different equilibrium properties. For some of these, nonconvergent equilibria do not exist. For others, nonconvergent equilibria in which candidates cluster at positions spread across the issue space are observed. In particular, we prove that the class of convex rules does not have Nash equilibria (convergent or nonconvergent) with the exception of some derivatives of Borda rule. We also look at “two‐party” equilibria. Implications for the firm location model are discussed.     

Voting by Successive Elimination and Strategic Candidacy

We study the impact of strategic choices of self-interested candidates of whether or not to enter an election. We focus on strategic candidacy in the context of the tree and binary voting procedures used by small groups such as committees. We offer a comprehensive analysis for the special but important case of voting by successive elimination. Strategic candidacy slightly enlarges the set of candidates that can be equilibrium outcomes relative to the traditional analysis which takes the set of candidates as fixed. Pareto-dominated candidates can be elected in equilibrium under voting by successive elimination when strategic candidacy is considered, in contrast with a fixed set of candidates. Journal of Economic Litterature Classification Numbers: D71, D72.     

SIGNALING THROUGH POLITICAL CAMPAIGNS: ELECTIONS AS A REVELATION MECHANISM

Political campaigns are usually seen either as a way of passing information about candidates' intended policies to the voters or as a political liability of the candidates towards the interest groups that finance them. We provide a different interpretation of political campaigns using a political competition model for campaign promises and spending. In a principal–agent framework, elections are shown to be a truth revelation mechanism, in which the principal (voters) induces truthful revelation of ability by the agent (candidates). Campaign promises and spending coexist as an integral part of this mechanism. Political competition is then derived endogenously.     

INSIDE THE IMPOSSIBLE TRIANGLE: MONETARY POLICY AUTONOMY IN A CREDIBLE TARGET ZONE

This paper examines the trade-off between exchange rate stability and monetary autonomy for a target zone. Using the guilder-mark target zone in the pre-Economic and Monetary Union period as a case study, we empirically estimate how much policy discretion the Dutch central bank still enjoyed and how much had been ceded to the German central bank. The sum of these two measures is an estimate of the policy autonomy under a free float. We find that the narrow guilder-mark target zone still permitted a modest degree of policy independence. This result suggests that intermediate exchange rate regimes may offer an attractive trade-off compared to the corner solutions (free float and monetary union), which is consistent with the "fear of floating" phenomenon. ( JEL E52, F33, F41, F42)     

Flip-flopping from primaries to general elections

I consider a model in which candidates must win a primary election to compete in the general election. Candidates may choose different policies in the primary and the general election, but doing so results in accusations of flip-flopping. I show that candidates adopt extreme policies in the primaries but then try to move closer to the center for the general election even though primary voters are forward-looking and anticipate this policy moderation. The extent to which candidates move closer to the center is constrained by flip-flopping costs, and candidates choose divergent policies in the general election. I obtain comparative statics results on candidate policy choices in terms of voter preferences.     

Lies, damned lies, and political campaigns

Despite a pervasive presence in politics, lying has not traditionally played a role in formal models of elections. In this paper we develop a model that allows candidates in the campaign stage to misrepresent their policy intentions if elected to office, and in which the willingness to lie varies across candidates. We find that candidates more willing to lie are favored, but that this advantage is limited by the electoral mechanism and to such an extent that more honest candidates win a significant fraction of elections. Most notably, the possibility that some candidates lie more than others affects the behavior of all candidates, changing the nature of political campaigns in an empirically consistent manner. This effect also implies that misleading conclusions will be drawn if homogeneous candidate honesty is assumed.     

Pandering and electoral competition

We study an election with two perfectly informed candidates. Voters share common values over the policy outcome of the election, but possess arbitrarily little information about which policy is best for them. Voters elect one of the candidates, effectively choosing between the two policies proposed by the candidates. We explore under which conditions candidates always propose the voters' optimal policy. The model is extended to include strategic voting, policy-motivated candidates, imperfectly informed candidates, and heterogeneous preferences.