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Romania's Exchange Rate Policy towards its European Monetary Union Membership - Prospects and Challenges

Nicu Marcu ()

Journal for Economic Forecasting, 2008, vol. 5, issue 1, 175-181

Abstract: This paper has a focus in considering the implications of the European integration for the present and future exchange rate arrangements between the European Union and Romania as an emerging country. The objective of this paper is to examine rather medium-term outlook for exchange rate arrangement involving Romania in its European membership process and the EU in the new single currency environment. The national currency has a managed floating exchange rate regime against the single European currency, compatible with the inflation targeting policy currently promoted in Romania. Romania will also have to register a quite problematic coexistence of inflation targeting with an exchange rate stability after joining the Exchange Rate Mechanism II. An exchange rate arrangement involving the national currency and the single European currency must be quite flexible to the economic conditions of Romanian economy and to the policy commitments of the authorities. The arrangement will also have to be compatible with the price stability objective of the European monetary policy and will need to strengthen the national authorities’ capacity of achieving the structural adjustment. The flexibility within the ERM II will allow all of these ends to be fulfilled. Joining the ERM II and thus registering a formal link to the single European currency, the Romanian economy will enjoy a greater credibility in the context of an anchor for macroeconomic policies. The ERM II has also a few disadvantages. A hard pegging with the euro inside the ERM II wouldn’t be appropriate given the incapacity of the emerging market system of determining an equilibrium level for the exchange rate of the national currency against the euro. A real exchange rate appreciation could also generate tensions as a result of price tendency and differences in productivity growth between the national economy and the Euro Area countries.

Keywords: exchange rate policy; EMU (search for similar items in EconPapers)
JEL-codes: E61 F15 (search for similar items in EconPapers)
Date: 2008
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Handle: RePEc:rjr:romjef:v:5:y:2008:i:1:p:175-181