1. ¹Department of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026, USA. E-mail: garjone@siue.edu, akutan@siue.edu
2. ²Center for European Integration Studies (ZEI), Bonn, Germany

Abstract

Several leading candidate countries will eventually enter the European Monetary Union (EMU). A key question is what exchange rate management policy should be pursued after joining the European Union (EU). This paper focuses on the impact of Euro-area monetary policy on Hungary. We find that Euro-area monetary policy shocks may be destabilising for Hungary as the impact of these shocks appears to be much greater on Hungarian industrial production than on Euro-area industrial production. Thus, Hungary has much to gain by retaining some monetary policy independence during the interim period between admission to the EU and adoption of the euro in order to isolate itself from Euro-area monetary policy shocks.