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A Macroeconomic Analysis of EU Accession under Alternative Monetary Policies

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  • MICHAEL B. DEVEREUX
Abstract
This article provides an analytical discussion of the adjustment to EU accession for an economy under alternative assumptions about monetary policy rules. The post‐accession phase is characterized by rapid capital inflows and real exchange rate appreciation. If accession is combined with membership of the euro area and a pegged exchange rate, then the post‐accession period exhibits excessive foreign borrowing, high wage inflation, an excessive stock market boom, and much too rapid growth in the non‐traded sector at the expense of the exportable goods sector. Alternative monetary policies can be used to eliminate the inefficiencies of the post‐accession adjustment, but some bring real costs in terms of lower growth and unemployment. We find that the best policy is one of flexible inflation targeting with some weight on exchange rate stability. In the absence of exchange rate adjustment, fiscal policy could be used, but this requires complicated time‐varying expenditure taxes. While the analytical discussion emphasizes the benefits of exchange rate adjustment, a later section of the article explores some more recent arguments regarding non‐traditional costs of exchange rate volatility.

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  • Michael B. Devereux, 2003. "A Macroeconomic Analysis of EU Accession under Alternative Monetary Policies," Journal of Common Market Studies, Wiley Blackwell, vol. 41(5), pages 941-964, December.
    • Handle: RePEc:bla:jcmkts:v:41:y:2003:i:5:p:941-964
    DOI: 10.1111/j.1468-5965.2003.00470.x
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    References listed on IDEAS

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    Cited by:

    1. Lipinska, Anna, 2006. "The Maastricht convergence criteria and optimal monetary policy for the EMU accession countries," MPRA Paper 1795, University Library of Munich, Germany.
    2. Robert Ambrisko, 2015. "A Small Open Economy with the Balassa-Samuelson Effect," CERGE-EI Working Papers wp547, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    3. Bas Aarle & Harry Garretsen & Cindy Moons, 2008. "Accession to the euro-area: a stylized analysis using a NK model," International Economics and Economic Policy, Springer, vol. 5(1), pages 5-24, July.
    4. Ravenna, Federico, 2005. "The European Monetary Union as a commitment device for new EU member states," Working Paper Series 516, European Central Bank.
    5. Simeon Coleman & Juan Carlos Cuestas, 2024. "On the evolution of competitiveness in Central and Eastern Europe: Is it broken?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 2911-2926, July.
    6. Lipinska, Anna, 2008. "The Maastricht Convergence Criteria and Monetary Regimes for the EMU Accession Countries," MPRA Paper 16375, University Library of Munich, Germany.
    7. Sanchez, Marcelo, 2007. "Monetary stabilisation in a currency union: The role of catching up member states," Journal of Policy Modeling, Elsevier, vol. 29(1), pages 29-40.
    8. Sánchez, Marcelo, 2006. "Implications of monetary union for catching-up member states," Working Paper Series 630, European Central Bank.
    9. Mikek, Peter, 2008. "Alternative monetary policies and fiscal regime in new EU members," Economic Systems, Elsevier, vol. 32(4), pages 335-353, December.
    10. Federico Ravenna & Fabio M. Natalucci, 2008. "Monetary Policy Choices in Emerging Market Economies: The Case of High Productivity Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2‐3), pages 243-271, March.
    11. Lipinska, Anna, 2008. "The Maastricht Criteria and Optimal Monetary and Fiscal Policy Mix for the EMU Accession Countries," MPRA Paper 16376, University Library of Munich, Germany.
    12. Anna Lipinska, 2006. "Monetary regime choice in the accession countries - a theoretical analysis," Computing in Economics and Finance 2006 243, Society for Computational Economics.

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