On May 1, 2004, the European Union has been enlarged by 10 countries (Estonia, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia, the Czech Republic, Hungary, Cyprus). The accession is accompanied by the expectation that the new member states will join the exchange rate mechanism II. After two years of membership in ERM II they will automatically become members of the European Monetary Union, provided they fulfill the convergence criteria specified by the Treaty of Maastricht. Because of the structural divergence in the levels of development, the accession to the monetary union implies economic risks for the new as well as for the old member countries. The sub-project C6 will study the risk involved in the enlargement from the perspective of monetary policy.
The research projects of this sub-project can be divided into three intertwined research areas. The first research area comprises econometric analyses of the monetary policy strategies and the transmission mechanisms in the new member countries. The focus in this area lies in the quantitative analysis of the convergence processes and the aggregate risks for monetary policy in the accession countries.
The focus of the second research area lies in the specification of macroeconomic structural models. While the work of the first area is mainly descriptive, in the second part of the project we will use structural analysis to study the economic risks embodied in the enlargement. We will quantify structural models for the new member countries which are compatible with the empirical results of the first part of the project. Based on the models we will analyze monetary policy questions.
The third research area is comprised by analyses on the introduction of the Euro in the accession countries. The focus is on the risks which the introduction of the common currency implies for the new members.