The Scope for an Independent Monetary Policy on

Transcript:The Scope for an Independent Monetary Policy on:
The Scope for an Independent Monetary Policy on the Path to EU Accession Erald Themeli Head of the Monetary Policy Department Presentation on Conference co-organized by the Bank of Albania and the Albanian Association of Banks The Role of Central Banks and Banking Systems on the Path to EU Motivation EU accession means an irrevocable commitment to an eventual adoption of Euro and access to the Eurozone However, new member states can choose to forego the immediate adoption of the Euro at the moment of access, if such an option is deemed sub-optimal Drawing a balance on the pros & cons of euro adoption / loss of monetary policy independence, is a complex exercise This presentation aims to present a preliminary assessment of the desirability of an early euro adoption for Albania 2 A brief theoretical background 3 The theoretical cost & benefits analysis of a monetary union are broadly grounded on the OCA framework The economic literature establishes three broad criteria / preconditions for joining a monetary union The existence of efficient adjustment & stabilization mechanisms Trade openness Labor and capital mobility Price and wage flexibility Financial integration Fiscal integration & transfers within a monetary union The existence of cyclical convergence The existence of structural convergence Content 4 Cyclical convergence between Albania and Euroarea Structural convergence between Albania and Euroarea A case study on the benefits of independent monetary policy for Albania Conclusions Source: MPD projections 5 All three key macroeconomic indicators seem to point to a rather synchronous cyclical behavior of Albanian and Euro area economy in normal times. Assessing Albania’s cyclical convergence vis-à-vis the Euroarea Source: MPD projections 6 Output Gap Inflation Gap (difference form Target) ST Interest rate across Key Episodes Output gap correlation during ‘normal’ times (in white) = + 0.33 Output gap correlation during uncertain times (in grey) = - 0.17 Three critical episodes of non-synchronous business cycles & diverging key macro indicators vis-à-vis the Euro area over a 15 year period. Assessing Albania’s cyclical convergence vis-à-vis the Euroarea Source: MPD projections 7 Albania has a fair degree of cyclical convergence with the Eurozone, indicating the EA-wide monetary policy stance might be thought of as broadly appropriate However, our inflation and business cycles appear to diverge in times of stress Cyclical convergence breaks down during periods of high economic or financial stress (GFC, Greek Sovereign Debt Crisis, the Conflict in Ukraine) Such Mixed Evidence