DP457 | The Roles of Monetary Policy in the Process of Economic Reform in Eastern Europe


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The first part of the paper analyzes the inflationary risks associated with price liberalization, the welfare costs of inflation and the difficulties of East European central banks in pursuing non-inflationary policies. The main obstacles are the low credibility of stabilization policies and a strategy problem, which is related to the high instability of real and financial sectors. The second part analyzes three options of an ecu-peg for East European currencies: a unilateral peg to the ECU, membership in the Exchange Rate Mechanism of the European Monetary System, and participation in a future European Monetary Union (EMU).