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The Eesti Pank Expreience in the ERM-II

The Eesti Pank Expreience in the ERM-II. Märten Ross Eesti Pank October 3 rd , 2005, Sofia. Background. Fixed exchange rate arrangement for ‘who knows how many years’ Public expectations, transmission mechanism Inflation well-checked Perception of ‘already a currency union’

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The Eesti Pank Expreience in the ERM-II

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  1. The Eesti Pank Expreience in the ERM-II Märten Ross Eesti Pank October 3rd, 2005, Sofia

  2. Background • Fixed exchange rate arrangement for ‘who knows how many years’ • Public expectations, transmission mechanism • Inflation well-checked • Perception of ‘already a currency union’ • ERM-II entry close to EU entry: any economic imlplications interconnected • Some global factors more important than ERM-II decision

  3. 7 12 DEM LIBOR (later EURIBOR) and EST TALIBOR spread A/positive 6 5,9 A-/positive 10 5 A-/stable 8 4,2 4 BBB+/positive 6 “Yes” in EU referendum 3 BBB+/stable 4 Most “easier” chapters were closed Commission published detailed timetable for negotiations 2 1,6 1,2 2 1,3 1 Invitation to negotiations 0,5 0,3 0,8 0,3 0,5 0 Feb 96 Dec 96 Sept97 July 98 May 99 Mar 00 Jan 01 Nov01 Sept02 June 03 Jan 04 Nov04 Jan 05 Estonia’s credit rating* and EU accession * - Estonia’s LT debt rating by Standard&Poor’s

  4. Inflation differential with euro zone well within “Balassa-Samuelson limits”

  5. About the entry • Pre-entry discussions very serious (‘good peer pressure’, but little knowledge of currency board) • Some dispute about its rationale • Complications in communication • How to communicate XR policy without XR? • is it a waiting room? • Entry itself was non-event for public • Estonian press reps in Brussels even did not notice it! And rightly so.

  6. About the life within the ERM II • So far no pressures whatsoever • Has not done at least any harm: PR of XR policies has become even easier • More squeezing from partners (‘good peer pressure – now for double’) • Minor additional technical responsibilities • Participation often taken de facto as a ‘waiting room’

  7. Interest rates have remained low

  8. About the economic implications • EU (ERM-II?) has been even bigger boost for growth, investment and productivity than expected • EU entry had technical implications for inflation – reasons difficult to communicate! • ERM II per se has not probably caused major capital flows • If ERM II entry is credibility enhancing and connected to euro entry expectations, then it adds to the demand pressure – it’s unavoidable and not necessarily bad

  9. Has potential changed?

  10. Food & Fuel: CPI components influenced by EU entry technicalities

  11. Capital flows influenced by underlying factors rather than ERM-II

  12. Conclusions • ERM II should not be overmystified • Its direct economic impact can be limited • It is not yet currency union • However, ERM II has not been also as harmful as some commentators predicted. Fundamentals are more important.

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