Exchange Rate Management in Central Europe and the Debate on Exchange Rate Regimes

Central European countries have achieved a remarkable performance in restructuring their production sector toward world markets. It could not have been successful without relative macroeconomic stability in times of recurrent financial crises in Asia, Russia and Latin America. The most crucial factor has been a sustained inflow of foreign direct investment and a correlative limitation of foreign indebtedness. Eschewing excessive exposure to hot money has permitted governments to adjust their exchange rates away from the extremes of hard peg and pure floating. Consequently monetary policy has been able to strike a workable balance between the objectives of fostering competitiveness and reducing inflation steadily. This experience provides strong evidence for intermediary exchange rate regimes against so-called corner solutions. However these regimes are softer than formal target zones. For ceec they require either adaptation to the convergence criteria or delayed entry into emu.