4/2008 Karsten Staehr. The Maastricht inflation criterion and the new EU members from Central and Eastern Europe

Working Papers of Eesti Pank. No 4/2008

This paper discusses the prospects of the new EU members from Central and Eastern Europe joining the European Economic and Monetary Union in the short and medium term. The countries must attain and sustain inflation rates sufficiently low to abide by the Maastricht inflation criterion, but this is complicated by the process of real convergence exerting upward pressure on the inflation rate. The paper discusses different strategies which the new EU countries can apply. It is argued that no one-size-fits-all policy is available and that some countries might be better off postponing EMU membership in pursuit of other goals. Still, the special circumstances concerning the Central and Eastern European EU countries suggest that the process of admission of new countries to the EMU should be adaptive and pragmatic.
JEL Code: E31, E61, F55
Key words: Monetary Union, inflation, Maastricht inflation criterion, CEE

* Karsten Staehr is a professor at Tallinn University of Technology and a research supervisor at Eesti Pank. The paper was prepared for the conference "The Economics of Enlargement" arranged by the American University and the EU Center of Excellence Washington D.C. and held on 22 August 2008 in Washington D.C. The author would like to thank Ellen Meade, Martti Randveer, Märten Ross, Steve Silvia and conference for useful comments and suggestions. All remaining errors and omissions are the responsibility of the author.

Author's e-mail address: karsten.staehr [at] tv.ttu.ee, karsten.staehr [at] epbe.ee

The views expressed are those of the author and do not necessarily represent the official views of Eesti Pank.

Contents

1. Introduction
2. The Maastricht inflation criterion
3. The rationale(s) for the inflation criterion
4. Satisfying the inflation criterion
4.1. Exchange rate policies
4.2. Inflation in NEU8 and the Maastricht inflation criterion
4.3. What drives inflation in the new EU countries?
4.4. Enlargement of the EU
4.5. Should the Maastricht inflation criterion be modified?
5. Strategies of the new EU countries
6. Summary
References
Appendix

The Maastricht Inflation Criterion and the New EU Members from Central and Eastern Europe, Working Papers of Eesti Pank No 4/2008 (PDF*)

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