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The Maastricht Convergence Criteria and Monetary Regimes for the EMU Accession Countries

Lipinska, Anna (2008): The Maastricht Convergence Criteria and Monetary Regimes for the EMU Accession Countries.

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Abstract

The goal of this paper is to study the ability of different monetary regimes to satisfy the Maastricht criteria. We perform our analysis in the framework of a two-sector small open economy DSGE model with nominal rigidities exposed to both domestic and external shocks. We analyze the regimes that reflect the policy choices observed in the EMU Accession countries, i.e. peg regime, managed float regime and flexible exchange rate regime with CPI inflation targeting. There exists a significant trade-off between compliance with the CPI inflation criterion and the nominal interest rate criterion. The sensitivity analysis reveals that the probabability that some of the regimes will satisfy all the criteria increases with openness of the economy and also degree of substitution between traded goods. Moreover, provided that two previous conditions are satisfied, degree of exchange rate pass through determines which of the regimes can comply with the criteria. Low degree of pass through enables regimes with managed exchange rate to fulfill all the criteria while high degree of pass through implies that the CPI targeting regime satisfies all the criteria.

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