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Exchange Rate Risk and Convergence to the Euro

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Author Info
Lucjan T Orlowski (Sacred Heart University)

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Abstract

This paper proposes a new monetary policy framework for effectively navigating the path to adopting the euro. The proposed policy is based on relative inflation forecast targeting and incorporates an ancillary target of declining exchange rate risk, which is suggested as a key criterion for evaluating the currency stability. A model linking exchange rate volatility to differentials over the euro zone in both inflation (target variable) and interest rate (instrument variable) is proposed. The model is empirically tested for the Czech Republic, Poland and Hungary, the selected new Member States of the EU that use direct inflation targeting to guide their monetary policies. The empirical methodology is based on the TARCH(p,q,r)-M model.

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File URL: http://129.3.20.41/eps/mac/papers/0501/0501034.pdf
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Publisher Info
Paper provided by EconWPA in its series Macroeconomics with number 0501034.

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Length: 34 pages
Date of creation: 28 Jan 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0501034

Note: Type of Document - pdf; pages: 34
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Web page: http://129.3.20.41

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Related research
Keywords: exchange rate risk; inflation targeting; monetary convergence; euro area; new EU Member States;

Other versions of this item:

Find related papers by JEL classification:
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
P24 - Economic Systems - - Socialist Systems and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Roman Matoušek & Anita Taci, 2003. "Direct Inflation Targeting and Nominal Convergence: The Czech Case," Open Economies Review, Springer, vol. 14(3), pages 269-283, July. [Downloadable!] (restricted)
  2. Olivier Jeanne & Andrew K. Rose, 2002. "Noise Trading And Exchange Rate Regimes," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 537-569, May. [Downloadable!] (restricted)
    Other versions:
  3. Juraj Valachy & Evžen Ko?enda, 2003. "Exchange Rate Regimes and Volatility: Comparison of the Snake and Visegrad," William Davidson Institute Working Papers Series 2003-622, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  4. R. Gaston Gelos & Ratna Sahay, 2001. "Financial market spillovers in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 9(1), pages 53-86, March. [Downloadable!] (restricted)
    Other versions:
  5. Craig Beaumont & Robert J. Corker & Dora M. Iakova & Rachel van Elkan, 2000. "Exchange Rate Regimes in Selected Advanced Transition Economies - Coping with Transition, Capital Inflows, and EU Accession," IMF Policy Discussion Papers 00/3, International Monetary Fund.
  6. Philippe BACCHETTA & Eric VAN WINCOOP, 2004. "A Scapegoat Model of Exchange Rate Fluctuations," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 04.01, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
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  7. Lucjan Orlowski, 2003. "Monetary Convergence and Risk Premiums in the EU Accession Countries," Open Economies Review, Springer, vol. 14(3), pages 251-267, July. [Downloadable!] (restricted)
  8. Laurence H. Meyer, 2004. "Practical problems and obstacles to inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 151-160. [Downloadable!]
  9. Egert, Balazs & Drine, Imed & Lommatzsch, Kirsten & Rault, Christophe, 2003. "The Balassa-Samuelson effect in Central and Eastern Europe: myth or reality?," Journal of Comparative Economics, Elsevier, vol. 31(3), pages 552-572, September. [Downloadable!] (restricted)
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  10. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
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  11. Carlo A. Favero & Francesco Giavazzi, 2004. "Inflation Targeting and Debt: Lessons from Brazil," NBER Working Papers 10390, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  13. Andrew T. Levin & Fabio M. Natalucci & Jeremy M. Piger, 2004. "The macroeconomic effects of inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-80. [Downloadable!]
  14. Ser-Huang Poon & Clive W. J. Granger, 2003. "Forecasting Volatility in Financial Markets: A Review," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 478-539, June.
  15. Lucjan T Orlowski, 2005. "Money Rules For The Eurozone Candidate Countries," Macroeconomics 0501033, EconWPA. [Downloadable!]
  16. Bofinger, Peter & Wollmershauser, Timo, 2001. "Is there a third way to EMU for the EU accession countries?," Economic Systems, Elsevier, vol. 25(3), pages 253-274, September. [Downloadable!] (restricted)
  17. Orlowski, Lucjan T., 2005. "Monetary convergence of the EU accession countries to the eurozone: A theoretical framework and policy implications," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 203-225, January. [Downloadable!] (restricted)
  18. Roberto Golinelli & Riccardo Rovelli, 2002. "Painless disinflation? Monetary policy rules in Hungary, 1991-99," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 10(1), pages 55-91, March. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Lucjan Orlowski & Krzyzstof Rybinski, 2005. "Implications of ERM2 for Poland’s Monetary Policy," William Davidson Institute Working Papers Series wp802, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
    Other versions:
  2. Tigran Poghosyan & Evzen Kocenda, 2006. "Foreign Exchange Risk Premium Determinants: Case of Armenia," William Davidson Institute Working Papers Series wp811, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
    Other versions:
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