ICERwp35-06 - INTERNATIONAL CENTRE FOR ECONOMIC RESEARCH...

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INTERNATIONAL CENTRE FOR ECONOMIC RESEARCH WORKING PAPER SERIES Nikolay Nenovsky MONETARY CONVERGENCE ON THE ROAD TO EMU: CONCEPTUAL ISSUES FOR EASTERN EUROPE Working Paper No. 35/2006
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Monetary Convergence on the Road to EMU: Conceptual Issues for Eastern Europe Nikolay Nenovsky Sofia University of the National and World Economy and ICER November 2006 Abstract: Traditional monetary and economic convergence in accordance with the Optimal Currency Areas model has a number of limitations. Above all, it fails to assess the state of formal and informal monetary institutions. Adequate for an industrial society, it does not address the change to a globalising information society, being mainly quantitative, aggregated, and generally mechanical. This removes it from reality, though keeping it close to a quantitative presentation. It fails to take into account invisible threats to convergence and East European country realities involving informal monetary institutions and differences in institutional development. Monetary regime efficiency is judged solely by Maastricht criteria fulfilment. These limitations may be overcome in two ways. The first is to take into account the institutional aspect of money, enabling discussion of institutional monetary convergence. The second way is to adopt institutional monetary competition, allowing at least some institutional competition in EEC monetary regimes in the run up to euro adoption and possibly allowing the euro to circulate in parallel with national currencies. The paper was written during the Author's stay as a visiting researcher at the Turin International Centre for Economic Research (ICER) in June 2006. An earlier and more technical version of it was presented before the Countries in Transition: Experiences and Challenges of EU Membership conference (Sofia, 17-19 November 2005) and The Wider Europe: Institutions and Transformation conference (Kyoto, 24- 26 November 2005). The Author is most indebted to Enrico Colombatto for his extended comments and to comments by Dimiter Ialnazov, Jean Marc Figuet, Michael Bolle, Neven Vulev, Laszlo Csaba, Vera Asenova, and Satoshi Mizobata. JEL classification : E42, O10, P30 Key words : institutional and monetary convergence, Eastern Europe
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2 Monetary Convergence on the Road to EMU: Conceptual Issues for Eastern Europe Introduction Today, convergence is at the focus of attention of European politicians, civil servants, economists, and researchers. European Union enlargement encompassing East European countries (EECs), and their eurozone entry in particular, entails stringent requirements for preliminary convergence: mostly Maastricht criteria which have to be met during the transitional ERM II stage. Among Maastricht criteria, only inflation and to an extent interest rates and
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ICERwp35-06 - INTERNATIONAL CENTRE FOR ECONOMIC RESEARCH...

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