Edited by Patrick Artus, André Cartapanis and Florence Legros
Chapter 10: Exchange Rate Regimes in the Route to EMU
Michel Aglietta, Camille Baulant and Sandra Moatti INTRODUCTION: DILEMMAS IN THE ROUTE TO EMU Monetary integration into the euro zone of central European countries, candidates for EC membership, will not be a smooth process. Between 1998 and 2001, most of these countries have moved to more ﬂexible exchange rate regimes. They have done so for good reasons. This chapter shows that preparing for EMU will be a tortuous and lengthy process. A precipitous move to the ERM-2 arrangement would be a cardinal error, which could undermine real convergence. To shed light on this matter the chapter is organized as follows. The ﬁrst part depicts the changes made by the main Central European countries in their respective monetary policy after the excesses of high inﬂation had been tamed. It epitomizes how these changes were made as a reaction to tensions triggered by the opening of the capital account and how a degree of ﬂexibility in the exchange rate was combined with domestic monetary management. The second part studies the combination of diﬀerent exchange rate regimes and monetary policy in a simple macroeconomic model. It shows that their interplay depends on imperfections in the domestic ﬁnancial system of these countries. Because of the destabilizing eﬀect of capital ﬂows, a managed ﬂoat cum monetary policy dedicated to stabilizing the foreign currency debt looks capable of compromising better between external and domestic imbalances. The third part deals with the possible tradeoﬀ between nominal and real convergence in the route to EMU....
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