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Convergence Expectations and Convergence Strategies. Lessons from the Hungarian Experiences in the pre-EU period1

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  • Agnes Csermely

    (Magyar Nemzeti Bank, Szabadság tér 8-9, H-1850 Budapest, Hungary.)

Abstract

Eurozone convergence provides a unique opportunity for accession countries to abandon macroeconomic stabilisation policies that suffer from weak credibility. On the other hand, expectations of future improvements in macroeconomic variables and trend appreciation of the currency may undermine the relationship between interest rates, exchange rates and economic fundamentals, making the economy vulnerable to sudden changes in market sentiments regarding the timing and path to Eurozone accession. Recent developments in Hungary illustrate the impact of changing expectations on exchange rate and interest rate volatility. Two lessons can be drawn from the Hungarian experience. First, benign market sentiment and easier access to finance does not imply less pressure to correct macroeconomic imbalances in the long run. Second, convergence strategies should be robust with respect to sudden shifts in capital flows. Programmes should maintain the shock absorbing capacity of fiscal and monetary policies and offer a contingency margin to ensure compliance with the announced adjustment plan in case of unforeseen developments. Slower convergence programmes might be more successful. Comparative Economic Studies (2004) 46, 104–126. doi:10.1057/palgrave.ces.8100043

Suggested Citation

  • Agnes Csermely, 2004. "Convergence Expectations and Convergence Strategies. Lessons from the Hungarian Experiences in the pre-EU period1," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 46(1), pages 104-126, March.
    • Handle: RePEc:pal:compes:v:46:y:2004:i:1:p:104-126
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    Cited by:

    1. Lucjan T. Orlowski, 2005. "Targeting Relative Inflation Forecast as Monetary Policy Framework for Adopting the Euro," William Davidson Institute Working Papers Series wp754, William Davidson Institute at the University of Michigan.
    2. Jesús Rodríguez López & José Luis Torres Chacón, 2007. "Following the Yellow Brick Road to the Euro?: Czech Republic, Hungary, and Poland," Eastern European Economics, Taylor & Francis Journals, vol. 45(6), pages 46-79, November.
    3. Orlowski, Lucjan T., 2004. "Exchange rate risk and convergence to the Euro," ZEI Working Papers B 25-2004, University of Bonn, ZEI - Center for European Integration Studies.
    4. Orlowski, Lucjan T., 2008. "Relative inflation-forecast as monetary policy target for convergence to the euro," Journal of Policy Modeling, Elsevier, vol. 30(6), pages 1061-1081.
    5. Kobor, Adam & Szekely, Istvan P., 2004. "Foreign exchange market volatility in EU accession countries in the run-up to Euro adoption: weathering uncharted waters," Economic Systems, Elsevier, vol. 28(4), pages 337-352, December.
    6. Matkowski, Z. & Prochniak, M., 2004. "Real Economic Convergence in the EU Accession Countries," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 1(3), pages 5-38.

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