1 / 27

Opti mal Currency Area

The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague. Opti mal Currency Area. Jaromír Šindel ECES.

kevyn-knox
Download Presentation

Opti mal Currency Area

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Optimal Currency Area Jaromír Šindel ECES

  2. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Topics • Optimal Currency Area • Theory, indices, ... • Euro-area – OCA? • Italian case, … • CEE countries and EU – OCA? • Are CEE countries OCA with Euro-area?

  3. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Exchange rate regime classification • Floating rate regimes • Floating rate with inflation targeting • Managed exchange rates without explicit targets (“dirty float”) • Pure floating rates: No CB intervention • Fixed-rate regimes • Soft pegs: Explicit targets without full monetary adjustment • Exchange rate bands and target zones • Crawling pegs, corridors, and tabilias • Use of sterilized intervention • Hard pegs: Full use of automatic monetary adjustment • Currency unions • “Dollarization” • Currency boards

  4. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Exchange rate regime classification Source: Holub, T.: Foreign Exchange Interventions Under Inflation Targeting: The Czech Experience. ČNB (2004).

  5. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Review of the OCA theory • Friedman (1953) - view on floating ER; • Mundell (1961) - his model of an asymmetric shift in demand of two countriesstressed that optimum currency area can differ form the actual currency areaandoffered some non-exchange rates means for adjustment as labourmobility, nominalflexibility and fiscal transfers; • McKinnon (1963), Kenen (1969), Ingram (In: Kawai, 1987) extended the list of non-exchange ratesmeans for adjustment (financialintegration, openness and nationalproduct diversification) • McKinnon (2000) - presents a neo-Keynesian model (elimination of the effect ofshocks by national monetary and fiscal policies +downward sloping and stablePhillips curve); • Mundell (1973a, 1973b) - which bring completely differentargumentationconcerning the optimum currency area; • others: Frankel and Rose (1998 a, b), Krugman (1993), De Grauwe (1997), Rodrick(2000), Fidrmuc (2001), etc. Source: Komárek

  6. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Currency unions Source: Komárek

  7. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Currency unions Source: Komárek

  8. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Currency unions Source: Komárek

  9. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Review of the OCA theory • Advantages of currency union • Lower transaction costs – reducing ER uncertainty • lower ER risk (FRA is expensive within high volatil currency – expensive for small producers) • Transparency of prices – higher competition • Higher gains to trade – Rose (increase in foreign trade) • for example risk-averse producers involve in foreign trade • Nominal archor for higher inflation coutries – lower inflation as result • Disadvantages • Loss of independent monetary policy (compare with dichotomy of MP) • Decreased flexibility in reacting to external shocks

  10. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Review of the OCA theory • Benefits outweigh costs if … • Markets are highly integrated • Goods markets, Financial markets, Labor markets • Shocks to currency union members are symmetrical (UK - oil) • Labor markets are flexible • Flexible fiscal policy for fiscal transfers (to cope with shocks) • Question of OCA endogenity • Convergence to OCA and higher flexibility follow integration process Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

  11. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Symmetry of shocks and Integration Review of the OCA theory Try to draw in the possible currency union between the USA and Canada. Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

  12. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Specialization vs. intra-industry trade Review of the OCA theory Frankel and Rose (1997) - Integration increases intra-industry trade what caused business cycle convergence Krugman (1993) - Economies of scale: integration increases trade specialization what caused asymmetric shocks Source: Komárek (ČNB).

  13. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Preferred degree of exchange rate flexibility and national monetary policy autonomy High Low Preferred level of the exchange rate Low Import–competiting producers of tradable goods for the domestic market Export oriented producers of tradable goods High Producers of nontradable goods and services International traders and investors Common Currency – interest group forming The possible preferences of economic sectors to national monetary policy Source: Frieden, J. (1991), p. 445

  14. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Maastricht convergence criteria and OCA theory • Ignored OCA theory’s micro factors • Emphasized macro factors • Desire to ensure same cyclicalposition • inflation not only factor • Low inflation countries wantedguarantee of fiscal restraint (compare with nowdays situation in Germany)

  15. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Euro-area – OCA? Italian case Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

  16. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Euro-area – OCA? Italian case Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

  17. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Euro-area – OCA? Italian case Increase of foreign savings for financing Italian economy … Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

  18. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Euro-area – OCA? Italian case • What about OCA? • Integration, flexibility, symmetry of shocks, fiscal flexibility • Italy and Euro-area – OCA? • Integration • About 60% of Italy’s trade is with EU partners; Comparisions - France—63% and Belgium—73% • Much better integrated than Argentina vs. US • Some barriers to financial market integration, e.g., banking • Labor mobility is low

  19. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Euro-area – OCA? Italian case … and high fiscal indebtedness … …but debt will growth …D = deficit/(q+π) … yield from integration. Without integration, no cheap indebtedness. Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

  20. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Euro-area – OCA? Italian case • Labor mobility is low and high ridigity at labor market … very low flexibility in the world comparison; …dangerous high union coverage (in addition political active) and low employers´coordination; Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

  21. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Euro-area – OCA? Italian case • Why flexibility? Shocks? Asymmetry? ??? … very low flexibility at labor market bring longer recovery to structural shock; …low correlation within real demand shock Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

  22. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Italy and leaving EURO – solution? • YES • RER and competitiveness; it can also enhanced fiscal consolodition; which brings easier monetary policy • Yes, it will bring quick recovery • NO – it is more realistic • High indebtedness (increase interest rate for Italian debt – risk premia + expected devaulation of new lira) • Politicians are weak x Unions strong (strikes) – no fiscal consolidation, no labor market reforms • Higher – inflation environment to reduce debt

  23. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Message from Italy for CEE countries • Labor market:Finish reforms before entry • Fiscal policy • Long-term fiscal sustainability should be achieved for fiscal flexibility • One-off measures to meet entry conditions is not enough • Exchange rate:Entry rate should be fundamental or realistic (adjustment of RER after entry is difficult) • NER (common NER), ULC (labor market and productivity), price differentials (compare with price convergence)

  24. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague GDP development(year on year changes) CEE countries and EA – OCA? Source: ČNB, 2005.

  25. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Correlation of economic activity(1– y/y, 2- q/q, 3– HP filter) CEE countries and EA – OCA? Source: ČNB, 2005.

  26. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Shock symmetry with euro-area CEE countries and EA – OCA? Source: Prof. E. Dolan, Lecture at VSE Prague, 2005.

  27. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Structural similarity (lower = higher similarity) CEE countries and EA – OCA? Source: ČNB, 2005.

More Related