Proceedings

Pawel Kowalewski presented a paper on the Polish exchange rate problems with a critical approach towards the current policy of appreciating national currency. He described the evolution of the Polish exchange rate arrangement since the first stabilization policies and noted that the gradual increase of flexibility was a necessary measure because of disinflation and high current account deficit problems. He questioned whether the shift to float was a good decision and whether the costs weren’t too high. He pointed that the policy of letting the Zloty appreciate contributes to the slow-down of export growth, may have adverse impact on the current account balance and spill-over to the economic growth which will be the lowest this year in the last 8 years.

Urmas Sepp elaborated the Estonian experiences, trying to asses the performance of the currency board arrangement in Estonia and to determine how post-shock adjustments work in such an economy. Mr. Urmas described the rationale for choosing currency board and the macroeconomic performance under it. He analyzed the transmission channels and concluded that the interest rate channel is more influential than the exchange rate one. He has also simulated the adjustment of the CBA to an exogenous shock and then described the actual performance of the economy under the major shock it was hit, the Russian currency crisis. Finally the presentation discussed in the light of legal and institutional aspects of expected EMU membership and the conflicts between the nominal and real convergence the options available for policy makers in Estonia. The conclusion was that Estonia should keep the currency board arrangement until her full membership in the EMU as this is acceptable on legal grounds and feasible on economic one.

Vladimir Lavrac evaluated the experiences of Slovenia with managed floating, mentioning that both the macroeconomic record and the evolution of exchange rate indicators have justified the initial choice and later reliance of monetary authorities. While the central bank may keep this arrangement till the expected EU and later ERM-II membership, Mr. Lavrac pointed to the difficulties stemming from the liberalization of capital flows, the slow-down in disinflation process, and the high exposure to exogenous shocks, which is unavoidable given the size of the economy.

Éva Várhegyi described in her presentation the evolution of the Hungarian exchange rate policy under the pre-announced crawling peg regime and the recent developments following the shift towards managed floating. According to her the crawl played an important role in strengthening the credibility of monetary policy, increasing fiscal discipline, and allowing the central bank to fight simultaneously against inflation and strengthen the competitiveness of tradable goods sector, while at the same time contributed to the emergence of strong backward looking expectations, inertial price increases, sizeable speculative capital inflows, which hampered disinflation and increased its costs. The shift to managed float was in line with the experience of other advanced transition economies and was expected to allow more room for monetary policy and support the convergence of inflation towards the EU levels.

Miroslav Beblavy analyzed the evolution of the Slovak exchange rate regime. He pointed to the stages of macroeconomic and exchange rate developments before the currency crisis of September 1998 which was mostly a home made crisis according to the author. The currency crisis resulted however in the shift of the exchange rate regime from the earlier pegged one to a managed floating and was accompanied by significant stabilization measures centered around fiscal and incomes policies with the aim of improving the unsustainable current account and fiscal balances. Mr. Beblavy described the evolution of the exchange rate regime, the changes in monetary arrangement from monetary to inflation targeting and its impact on central bank policies.

Peter Backé contributed with an overview paper discussing the price developments and their influence on exchange rate policies in these economies. He mentioned that the process of price convergence is strong, and it has exposed the economies in question to different extent. Mr.Backé determined three major sources of price convergence. The first is a transition related due to the changes in the administrative prices and liberalization of remaining regulated ones. The another one is associated with the Balassa-Samuelson-impact, while the last source of price increases is linked to the integration process of these economies.

Cezary Wójcik presented a paper dealing with the issue’s of Euroisation in general and then addressing the feasibility and desirability of its adoption for Poland. The first part of his presentation emphasized the major costs and benefits stemming from giving up ones national currency and surrendering its own monetary policy. The presentation emphasized that benefits accrue from greater financial integration, decline of interest rates and transactions costs, but these benefits are outweighed by the costs in the form of loss of seigniorage and lender of last resort, increased exposure to exogenous shocks, the lack of adjustment possibility after giving up ones national currency. The final conclusion of the author was therefore that Poland should avoid euroising its currency as a mean of promoting the accession to the European Monetary Union.

Pál Gáspár presented a paper assessing the relationship between real and nominal convergence in these economies and their impact on the choice of the exchange rate regime. In the process of catching up there are three convergence processes: real convergence meaning the narrowing of differences in price and wage levels, per capital incomes , actual and equilibrium exchange rate levels, the nominal one presented in meeting the Maastricht criteria and the structural one most closely related to the meeting of the OCA criteria. He showed that while real and nominal convergence may stimulate each other in several aspects there are trade-offs between the two. Based on them the presentation assessed the viability of three alternative exchange rate arrangements prior to the EMU membership (hard peg, soft peg and floating) and concluded that the more flexible arrangements can help in mitigating these trade offs and promote better both real and nominal convergence.

Andreas Freytag in his presentation described the exchange rate alternatives available for these economies and the link between exchange rate regime and monetary arrangement. His presentation emphasized that the choice of the exchange rate regime plays an important but not exclusive role in the policy mix of applicant economies. The theoretical considerations and the empirical evidence suggest that legal monetary commitments and the institutional framework and the match between them are equally important. Based on this any choice of the exchange rate regime should be built on the analysis of this relationship and the presenter argued for considering another option for the applicant economies: a common strategy with a floating or fixed exchange rate towards the Euro, a strategy similar to the EMS II.

In his second contribution Miroslav Beblavy described the foreign exchange rate policies and their outcomes in 4 pre-accession economies as a part of monetary policy framework. His empirical assessment contradicted to the hollowing out hypothesis as these economies have consistently pursued intermediate foreign exchange rate regimes. The major reason behind this choice is related to the role exchange rate regimes played in the process of disinflation and preserving external competitiveness. The empirical part of the paper found that there has been an overall trend real appreciation, but on the other hand the short-term volatility of the nominal exchange rat could not be attributed to any particular exchange rate regime.

In closing the conference Pawel Kowalewski and Pál Gáspár gave a summary presentation of the major findings of the research program. They describe the major stages of the evolution in the exchange rate arrangements of these economies starting from the preference towards pegged regimes at the beginning of transition and describing how these initial arrangements have been flexibilised in the majority of applicant economies. The major factors behind this shift to more flexible arrangements stem from increased capital inflows and financial integration, the simultaneous need to proceed with disinflation and maintain external competitiveness, from trend real exchange rate appreciation and changes ion relative price structures. The presentation then described the major factors that affect the choice of exchange rat arrangement for pre-accession economies, including the management of nominal and real convergence, the incorporation of trend appreciation and of the Balassa-Samuelson-effect. Considering the costs and benefits of alternative arrangements the presentation concluded that the preference for more flexible arrangements is justified