Nominal and Real Convergence in Alternative Exchange Rate Regimes in Transition Countries: Implications for the EMU Accession

Abstract

This paper discusses the processes of nominal and real convergence and their dependence on exchange rate regimes adopted in Central and Eastern European countries (CEECs) in thecontext of their future EMU accession. We focus our argument on the possibility of trade-off between the pace of disinflation and the maintenance of competitiveness and growth. Fixednominal exchange rate shifts the burden of adjustment on to the tradable sector but whether this pressure results in faster restructuring and faster productivity growth or becomes a straightjacket for the economy is an open question. The paper implements a simple empirical assessment of convergence of inflation to EU levels and economic growth of 7 CEE economies which had adopted different exchange rate regimes in period 1993-2002. Results indicate that fixed exchange rates seem to have been a better tool of fighting inflation as compared to floating exchange rates or intermediate regimes. The presence of a fixed exchange rate has also been characterised byhigher real GDP growth rates implying an absence of trade-off between nominal and real convergence in the investigated sample. Qualifications attached to these results are discussed.