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Financial and Monetary Integration in the New Europe

Convergence Between the EU and Central and Eastern Europe

Edited by David G. Dickinson and Andrew W. Mullineux

Potential new entrants to the European Union from Central and Eastern European countries face many challenges to achieve financial convergence with the existing EU nations. Using detailed case studies from Bulgaria, the Czech Republic, Latvia, Lithuania and Poland and analysis of cross country data from these regions, Financial and Monetary Integration in the New Europe looks at the key issues for applicant countries as they negotiate the terms of their membership in the European Union. Of major concern to these countries is the financial sector and its implications for economic growth and the conduct of macroeconomic policy. The book examines, in particular, monetary and exchange rate policies, banking regulation and financial market efficiency. The overall impact of building a market driven financial system on economic development is also explored.
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Chapter 2: Monetary policy and economic development in transitional economies

Convergence Between the EU and Central and Eastern Europe

Maxwell J. Fry


Maxwell J. Fry INTRODUCTION The extent to which a central bank can choose and implement appropriate monetary, financial stability and payment system policies varies considerably across countries. In the transitional economies, expertise formed one serious constraint in the early years (Knight 1997). Not only was expertise scarce in the central bank but also within the financial sector as a whole. Rapid transformation from a monobanking system into a two-tier banking system faced not only lack of expertise and experience but also little understanding of fundamental economic concepts such as opportunity cost and time value of money. Many gaps existed in the financial landscape in terms of institutions and markets that typically constitute financial sectors in the industrial countries. Central bankers also faced uncompetitive and uncooperative commercial banking systems. Much has changed over the past decade in the transitional economies. But some transitional economies have adapted to their new environments more quickly and successfully than others. So there is perhaps more diversity now than there was at the outset. Nevertheless, there are several common features of the process of financial liberalization and financial development. For example, whatever legal independence is assigned, central banks in transitional economies have been constrained by their countriesÕ fiscal situation and exchange rate regime (Fry and Nuti 1992; Koch 1997). Since good monetary policy contributes to economic development, in this chapter I shall examine some constraints to implementing stabilizing monetary policy that exist in transitional and developing countries. INFLATION GROWTH RELATIONSHIPS In the 1960s, much of the...

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