From inflation targeting to the euro-peg: A model of monetary convergence for transition economies |
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Institution: | 1. EGADE Business School, Tecnológico de Monterrey, Ave. Rufino Tamayo, San Pedro Garza García, NL C.P. 66269, México;2. Department of Economics, University of Texas at Austin, 2225 Speedway, Austin, TX 78712, United States |
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Abstract: | This study proposes a sequence of monetary convergence to the eurozone, based on autonomous monetary policy rather than on an early application of the euro-peg. The gradual adjustment process begins with a relatively strict variant of inflation targeting, followed by flexible inflation targeting, and ends with exchange rate targeting. A model outlining the optimal mode of policy adjustment is presented. The analysis warns against a premature peg to the euro, which may instigate real currency appreciation, large capital inflows and their costly sterilization. The euro-peg can be introduced only when the candidates’ monetary authorities reach a certain degree of “foundational credibility”. The model of monetary convergence is followed by the empirical assessment of inflation targeting in the Czech Republic and Poland. |
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