The Optimal Euro Conversion Rate in a Stochastic Dynamic General Equilibrium Model

Balázs Világi ()
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Balázs Világi: Magyar Nemzeti Bank

No 2003/11, MNB Working Papers from Magyar Nemzeti Bank (Central Bank of Hungary)

Abstract: This paper, using a stochastic dynamic general equilibrium framework, considers how a small open EMU accession country should choose its Euro conversion rate. In this model a monetary union is interpreted as a perfectly credible infinite nominal exchange rate peg, and an algorithm is provided which maps the vector of accession date values of the state and the exogenous variables to a certain size of nominal exchange rate devaluation or revaluation. It is shown that it is not enough to base the decision on exclusively one factor, namely, the real exchange rate misalignment, although this has a primary role in the determination of the optimal conversion rate. Beyond the real exchange rate, the inflation rate, the real and the nominal wage level, the state of the foreign business cycle, as well as foreign price levels and productivity are the most important additional factors necessary for finding the optimal solution.

Keywords: Optimal monetary policy; small open economy; equilibrium real exchange rate. (search for similar items in EconPapers)
JEL-codes: E31 E52 F41 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:mnb:wpaper:2003/11

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