The continuing global crisis reinforces the need for Europe’s transition economies to find a robust strategy for macroeconomic policy in the period leading up to accession and in preparation for joining EMU. This report examines three of the issues that need to be resolved along the way: How should policymakers think about the actual and the desirable evolution of the real exchange rate in transition economies? What nominal anchor should be adopted? To what extent must any credible monetary policy be underpinned by sound fiscal policy?
Implicit in all these questions is the appropriate speed of disinflation; the tradeoffs between fiscal prudence, adequate government expenditure on infrastructure, and regulatory capacity; and the implications for capital flows and the vulnerability of the banking system.