The EMU Enlargement and the Choice of the Euro Conversion Rates: Theoretical and Empirical Issues

Abstract

The paper deals with the choice of the nominal euro conversion rates for the acceding countries upon their accession to EMU. The paper reviews theoretical models of equilibrium exchange rates as well as discusses their interpretation and the ensuing policy recommendations. Problems with empirical estimations of existing models are addressed. It is argued that despite several equilibrium exchange rate theories not all of them are useful for the real policy choice of the nominal conversion rate. This and the intrinsic uncertainty of equilibrium exchange rate estimates lead to the conclusion that the range of “optimal” euro conversion rates is quiet wideand other issues must be taken into account. In particular, a smooth transition to the euro conversion rate and minimisation of risks of potential shocks to the economy should be the keyconcern. Consequently, recommendations for the selection of nominal conversion rates are largely dependent on the current exchange rate regime.