The European Monetary Union as a Commitment Device for New EU Member States

Arbeitspapier

We show that the credibility gain from permanently committing to a fixed exchange rate by joining the European Monetary Union can outweigh the loss from giving up independent monetary policy if the domestic monetary authority does not enjoy full credibility. Using a DSGE model, this paper shows that when the central bank enjoys only limited credibility a pegged exchange rate regime yields a lower loss compared to an inflation targeting policy, even if this policy ranking would be reversed in a full-credibility environment. There exists an initial stock of credibility that must be achieved for a policy-maker to adopt inflation targeting over a strict exchange rate targeting regime. Full credibility is not a precondition, but exposure to foreign and financial shocks and high steady state inflation make joining the EMU relatively more attractive for a given level of credibility. The theoretical results are consistent with empirical evidence we provide on the relationship between credibility and monetary regimes using a Bank of England survey of 81 central banks.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 98

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Price Level; Inflation; Deflation ; International Economic Order and Integration ; Open Economy Macroeconomics
• Subject: Inflation targeting ; Credibilty ; Open Economy ; Exchange Rate Regimes ; Monetary Policy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Ravenna, Federico
• Event: Veröffentlichung
• (who): Oesterreichische Nationalbank (OeNB)
• (where): Vienna
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/264690
• Last update: 10.03.2025, 11:42 AM CET