Maret Veiner

ABSTRACT Economic theory has stressed the vulnerability to currency crises of intermediate exchange regimes. ERM II constitutes a fixed but adjustable pegged exchange rate arrangement and can therefore be categorized as an intermediate regime, in contrast to polar regimes such as currency boards and freely floating exchange rates. Our regression results for eight new EU Member States reveal the role of economic fundamentals in explaining exchange market pressure in these countries and confirm the bipolar view on exchange rate regimes. We conclude that the new EU members should not enter ERM II before their fundamentals are strong enough to compensate for the vulnerability of the exchange rate regime. Otherwise the condition for entering EMU, i.e. preceding participation in ERM II without devaluation or serious tensions on the exchange market, could be jeopardized. Copyright (c) 2007 The Author(s); Journal compilation (c) 2007 Blackwell Publishing Ltd.

In this paper we find evidence that institutional improvements such as economic liberalization, improved corporate governance, banking sector reform, improvements of rule of law and pushing back corruption have significantly reduced tensions on the exchange market in the formerly planned Central and Eastern European transition economies. We also show that countries with extreme exchange rate arrangements (such as a currency board or a freely floating exchange rate) have – ceteris paribus – been less vulnerable to turbulence on the exchange market than countries with intermediate exchange rate arrangements, such as an adjustable fixed peg. This confirms the so-called bi-polar view on exchange rate regimes for this group of countries. Testing for the interaction between economic fundamentals (current account, domestic credit growth and the inflation differential) and institutions our results are in general quite supporting to the hypothesis that a higher quality of institutions lessen...

In this paper we provide new evidence on aggregate labour market flexibility in the four largest new EU member states from Central Europe (CEEC4) and a benchmark of existing EU countries (EU9). This is done trough direct comparison of several labour market institutions from which we derive an institutional summary indicator. Another approach that we follow is the estimation of aggregate wage Phillips curves from which we obtain estimates for the wage responsiveness to unemployment in these countries. The results show that the CEEC4 cannot be regarded as an homogeneous group. The Czech Republic and Hungary are relatively flexible and comparable to the United Kingdom. Poland belongs to a subgroup with France, Germany and Italy, with reduced labour market flexibility. The results are especially problematic for the Slovak Republic where aggregate wages do not respond to unemployment, although labour market institutions are still more supportive to flexibility than in most incumbent EU c...