Front Matter

Front Matter

Author(s):
International Monetary Fund
Published Date:
April 2005
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© 2005 International Monetary Fund

Production: IMF Multimedia Services Division

Figures: Theodore F. Peters, Jr.

Cataloging-in-Publication Data

Adopting the euro in Central Europe : challenges of the next step in European integration / Susan Schadler … [et al.]—Washington, D.C.: International Monetary Fund, 2005.

p. cm.—(Occasional paper, ISSN 0251-6365) ; 234

Includes bibliographical references.

ISBN 1-58906-350-3

1. Euro—Europe, Central. 2. Europe, Central—Economic integration. 3. Economic and Monetary Union. 4. Monetary policy—Europe, Central. I. Schadler, Susan. II. Occasional paper (International Monetary Fund) ; no. 234

HG925.A36 2004

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Contents

The following conventions are used in this paper:

  • … to indicate that data are not available or not applicable;

  • — to indicate that the figure is zero or less than half the final digit shown;

  • – between years or months (for example, 1991–92 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

  • / between years or months (for example, 1991/92) to indicate a fiscal or financial year.

“Billion” means a thousand million; “trillion” means a thousand billion.

“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

Minor discrepancies between constituent figures and totals are due to rounding.

The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.

Preface

Upon entry into the European Union (EU), countries become members of the Economic and Monetary Union (EMU) with a derogation from adopting the euro as their currency (that is, each country joining the EU commits to replace its national currency with the euro, but can choose when to request permission to do so). For most of these countries, adopting the euro will entail major economic changes. This paper examines likely economic developments and policy challenges for the five former transition countries in central Europe—the Czech Republic, Hungary, Poland, the Slovak Republic, and Slovenia—that joined the EU in May 2004, operated independent monetary policies, but had not yet achieved policy convergence with the rest of the euro area by that time.

This study was prepared by a team led by Susan Schadler and consisting of Paulo Drummond, Louis Kuijs, Zuzana Murgasova, and Rachel van Elkan. The study has benefited from comments by various departments of the IMF; staff of the European Central Bank (ECB) and the European Commission (EC); participants in a conference on Euro Adoption in Prague in February 2004; and seminars at the National Bank of Poland, Czech National Bank, and Magyar Nemzeti Bank. Material presented in this study was originally prepared as background for an IMF Executive Board seminar on euro adoption in February 2004. The cutoff date for data revision was April 2004. Since that date, revisions to data for Greece, in particular, were significant and could influence the conclusions of parts of the study.

The authors are particularly grateful to Indra Mahadewa, Socorro Santayana, and Jocelyn Rivera for processing the original text; to Jolanta Stefanska and Jehan Panthaki for excellent research assistance; and to Jim McEuen of the External Relations Department, who edited the paper and coordinated the production of the publication. The views in the paper are those of the authors and do not necessarily reflect the views of national authorities or IMF Executive Directors.

Abbreviations

ANOVA

Analysis of variance

B and K

Borghijs and Kuijs (2004)

BCPS

Bank credit to the private sector

BEER

Behavioral equilibrium exchange rate

BIS

Bank for International Settlements

B-S

Balassa-Samuelson

CAP

Common Agricultural Policy (EU)

CEC

Central European country

CEC-H

CECs minus Hungary

CPI

Consumer price index

CUSUM

Cumulated sum of recursive residuals

EC

European Commission (EU)

ECB

European Central Bank (EU)

ECOFIN Council

Council of Economics and Finance Ministers of the EU

EFC

Economic and Financial Committee (EU)

EMU

Economic and Monetary Union (EU)

ERM/ERM2

Exchange Rate Mechanism (EU)

ESA-95

European System of Accounts 1995 (Eurostat, 1996)

EU

European Union

Eurostat

Statistical Office of the European Communities (EU)

FDI

Foreign direct investment

FEER

Fundamental equilibrium exchange rate

FRER

Fundamental real exchange rate

FSAP

Financial Sector Assessment Program (IMF–World Bank)

FSSA

Financial System Stability Assessment (IMF)

GDP

Gross domestic product

GEM

Global Economic Model (IMF)

GFS

Government Finance Statistics (IMF)

GFSM

Government Finance Statistics Manual 2001 (IMF, 2001)

GLS

Generalized least squares

GMM

Generalized matrix of moments

HP

Hodrick-Prescott

IIP

International investment position

IRF

Impulse response function

MF

Mundell-Fleming

MULTIMOD

Multiregion Macroeconomic Model (IMF)

NATREX

Natural real exchange rate

OCA

Optimum currency area

OECD

Organization for Economic Cooperation and Development

OLS

Ordinary least squares

PAYG

Pay as you go

PPP

Purchasing power parity

REER

Real effective exchange rate

RER

Real exchange rate

SGP

Stability and Growth Pact (EU)

SITC

Standard International Trade Classification

SNA

System of National Accounts 1993 (EC and others, 1993)

SVAR

Structural VAR

TEF

Taylor efficiency frontier

TFP

Total factor productivity

ULC

Unit labor costs

UN

United Nations

UNDP

United Nations Development Program

VAR

Vector autoregression

VAT

Value-added tax

VECM

Vector error correction model

VSTFF

Very short-term financing facility (ECB)

WEO

World Economic Outlook (IMF)

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