Review article

Euroization, monetary union and the credibility of monetary policy

Luka Brkić ; Faculty of Political Science, University of Zagreb, Zagreb, Croatia
Kristijan Kotarski ; Faculty of Political Science, University of Zagreb, Zagreb, Croatia

Abstract

Assessment of exchange-rate arrangements has become an integral feature of recent discussions on reform of the international financial architecture. The upshot of this recent interest in exchange-rate regimes is that a large part of the profession appears to have become converted to ‘the hypothesis of the vanishing middle regime’, for countries well-integrated into world capital markets, there is little, if any, middle ground between floating exchange rates and monetary unification. The literature on optimal currency areas emphasizes that policy independence is crucial if countries face recurrent idiosyncratic disturbances. If member-countries of the EMU show sizeable asymmetry in the timing of business cycle phases and their exposure to exogenous shocks, these countries may be better off retaining their ability to conduct monetary and exchange-rate policies. Consequently,the important empirical issue is whether Europe is a region in which country-specific shocks prevail or whether shocks affect most of these countries in a similar way. Euroization
is a relatively rare phenomenon. Yet in recent years it has attracted a lot of attention,which can be proved by an increasing number of studies dealing with this problem, as well as an increasing number of countries taking this course of action. This paper deals with the
advantages and disadvantages of euroization (dollarization), not only from the theoretical aspect but also on the basis of experience of other dollarized countries. The unequivocal conclusion is that euroization (dollarization) is not a monetary policy instrument that can
be recommended to Croatia.

Keywords

exchange-rate regime; euroization; optimum currency areas; monetary union; BBC regime; FBAR regime

Hrčak ID:

35428

URI

https://hrcak.srce.hr/35428

Publication date:

31.3.2009.

Article data in other languages: croatian

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