Options For The Exchange Rate Policies Of The EU Accession Countries (And Other Emerging Market Economies)

Peter Bofinger () and Wollmershäuser, Timo
Authors registered in the RePEc Author Service: Timo Wollmershäuser

No 2379, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop an institutional framework for central banks that try to pursue a stability-oriented monetary policy with the strategy of exchange rate targeting. Recent experience shows that a crucial element of this approach is to avoid destabilizing capital inflows. Policy makers can exert monetary pressure by two different but interrelated channels: the interest rate and the exchange rate. We introduce an open-economy Taylor Rule that determines the domestic interest rate of a central bank targeting a depreciation of its exchange rate. The interrelation of the two channels is taken into account by a risk premium adjusted uncovered interest parity condition. In our view sustained violations of this constraint provide an important explanation for the problem of speculative capital inflows. We distinguish between two basically different types of pegs: fixed nominal exchange rate targets and flexible nominal exchange rate targets. With the lessons that we draw from the past experiences of these regimes in Asia, Latin America, Eastern and Central Europe and the ERM I, we develop a framework for the exchange rate strategies of the accession countries during their path towards EMU entry.

Keywords: risk premium; Capital flows; Uip; Emerging market economies; Monetary integration; open-economy Taylor Rule; monetary pressure index; EU accession countries; flexible nominal exchange rate target (search for similar items in EconPapers)
JEL-codes: E42 F33 F36 F41 (search for similar items in EconPapers)
Date: 2000-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Options for the exchange rate policies in the EU accession countries (and other emerging market economies) (2000)
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