Nominal and Real Forex Regimes and EMU Accession

Abstract

Is the choice of the foreign exchange (forex) regime important for real growth? The objective of this chapter is to investigate this issue geared towards the inception of the EMU and the transition of the CEECs during the 1990s. We find that the choice of the nominal forex regime is not of first-order importance for achieving high and stable real growth. The empirical evidence is that the output growth was unrelated to the amount of nominal forex variability, and the type of currency arrangement in place. The fact that real growth is insulated from the nominal forex variability and the nominal forex system is analogous to the well-established relative insensitivity of the trade account to nominal forex uncertainty; see for instance Bacchetta and van Wincoop (2000).