Introductory Remarks for the Contemporary Economic Policy Special Section on "Monetary Policy Issues of New EU-Member and Candidate Countries"
Hochreiter, Eduard, Siklos, Pierre, Contemporary Economic Policy
The articles contained in this special section are substantially revised and updated versions of papers, which were originally presented at the Annual Conference of the Western Economic Association in Vancouver in 2004. They are written by central bank economists and deal with important theoretical and policy issues from the point of view of two new European Union (EU) member states (NMSs), the Czech Republic and Hungary, as well as a EU candidate country, Croatia. The insights gained by policy makers in these countries can translate into policy recommendations for other countries. As a consequence, these articles are of interest to a much broader audience.
According to the EU Accession Treaty, all the NMSs are required to adopt the euro at some stage. However, the timing of the adoption of the euro is conditional on the fulfillment the Maastricht Convergence Criteria. Hence, while there is a presumption regarding the euro conversion date that is contained in government programs, there remains some uncertainty regarding that date. Furthermore, within the constraints of the EU Treaty requirement of stability-oriented monetary policies, EU member countries that have not yet adopted the euro have some degree of freedom regarding the monetary policy strategy in the period up to the introduction of the euro. Finally, historical legacies such as a high degree of dollarization have an important impact on monetary policy at the present stage.
Csajbok and Rezessy (C & R) deal with the first of the issues noted above from a Hungarian (financial market) perspective. Using an uncovered interest rate parity framework, the authors study the potential impact of a shift in market expectations regarding a country's euro area entry date on long-term yields and the spot exchange rate. By comparing implied forward interest rates, which are obtained from zero-coupon yield curves and the euro area, C & R are able to deduce the markets expectations for Hungary's euro conversion date. They conclude that an outward revision of the presumed euro conversion date, say, due to weaker economic fundamentals, such as higher budget deficits, or a decline in the credibility of the convergence process in general will immediately be reflected in the long-term yields and in a depreciation of the exchange rate. As a tentative policy conclusion it emerges that the NMSs should only join the exchange rate mechanism II (ERM II) once a credible (Maastricht) convergence process is on track and the presumed euro adoption date is credible.
While seven of the 10 NMSs already decided to enter the ERM II, which is a requirement for the eventual adoption of the euro under the Maastricht Economic Convergence Criteria, the remaining three NMSs (Czech Republic, Hungary, and Poland), for the time being, opted for a floating exchange rate regime, anchored by inflation targeting, relying on an inflation target that is at or near the price stability definition of the European System of Central Banks ("below but close to 2 percent"). …