Alternative Paths Towards EMU: Lessons from an Expanded Mundell-Fleming Model for the Accession Countries

A small expectations-expanded Mundell-Fleming model is built for the European Union Accession Countries and estimated to assess the optimality of different exchange rate regimes (a peg and a float) through a simple welfare function. Floating appears as the best option for most of the countries in our sample, and this conclusion is robust to changes in the weights of the welfare function. The shock absorbing qualities of the regimes for different types of innovations is assessed via a VAR and a structural model, and here again the float seems to outperform a harder regime, in the emergence of temporary shocks.