Focus on Central, Eastern and South-Eastern Europe
Edited by Ewald Nowotny, Peter Mooslechner and Doris Ritzberger-Grünwald
Chapter 5: The Czech Republic on its Way to the Euro: A Stabilization Role of Monetary Policy Revisited
Jaromír Hurník, Zdeněk Tůma and David Vávra1 5.1 INTRODUCTION With the onset of European monetary integration eventual euro area membership was associated with several positive effects that were expected to have improved the long-term macroeconomic performance of member countries in terms of price stability and long-term output growth and were thus considered by European and national authorities alike to provide the economic rationale for the common currency project. However, ten years after the establishment of the euro area, the long-term effects on macroeconomic performance other than the delivery of price stability remain to be proved. It can be argued, of course, that this by itself is a huge success and such argumentation is right, except for two observations. First, apparently more was expected on the real side, or at least the real-side improvement was often used as an argument in the debate. Second and more importantly, if price stability is the only clear macroeconomic result of euro area membership, then what is left for a country that has achieved price stability on its own? Providing an economically meaningful answer to this question requires reframing the debate about euro area membership as a debate about the choice of the exchange rate regime. Indeed, it is not surprising that the monetary policy framework is neutral in the long run in terms of real economy effects and that price stability can be achieved under various regimes. Then only the question of the relative size of nominal versus real...