Ramón María-Dolores Pedrero, José García Solanes
This paper combines theoretical and empirical analysis to derive the desirable exchange rate regimes for eight of the New Member States of the EU in their initial steps towards EMU. The theoretical model takes into account the size of the internal market distortions and technological gaps of these countries, and assumes forward looking behaviour of both firms and households. In the empirical part, we calculate numerical values for the incumbent parameters and estimate SVAR models in order to extract variances and covariances between shocks to these economies and to the euro area, which are necessary to compute individual social losses and derive the optimal regimes. The main result is that the choice vanes depending on the institutional and structural features of each economy, and on the likely source and nature of economic shocks to which it is exposed.