From Inflation Targeting to the Euro-Peg: A Model of Monetary Convergence for Transition Economies
This study proposes a sequence of monetary convergence to the eurozone, based on autonomous monetary policy rather than on an early application of the euro-peg. The gradual adjustment process begins with a relatively strict variant of inflation targeting, followed by flexible inflation targeting, and ends with exchange rate targeting. A model outlining the optimal mode of policy adjustment is presented. The analysis warns against a premature peg to the euro, which may instigate real currency appreciation, large capital inflows and their costly sterilization. The euro-peg can be introduced only when the candidates’ monetary authorities reach a certain degree of “foundational credibility”. The model of monetary convergence is followed by the empirical assessment of inflation targeting in the Czech Republic and Poland.
Orlowski, L. T. (2001). From Inflation targeting to the Euro-peg: A model of monetary convergence for transition economies. Economic Systems, 25(3), 233–251. Doi: 10.1016/S0939-3625(01)00020-6