1887

OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

English, French

The Euro Changeover in the Slovak Republic

Implications for Inflation and Interest Rates

In January 2009, the Slovak Republic will adopt the euro and become the 16th member of the euro area. This paper investigates the implications of euro adoption in the Slovak Republic for inflation and interest rates with an attempt to quantify their likely size as well as their consequences for the general public. The empirical analysis – which makes use of the experience of the first-wave euro area countries – suggests that the cash changeover will most likely be associated with a moderate increase in consumer prices, estimated at around 0.3%. Policy measures to reduce this effect include public information campaigns, the conversion of publicly administered prices with the exact conversion rate and the reduction of administrative obstacles to increase supply. The minor purchasing power losses associated with this price increase will not be evenly distributed across the population with higher income households and families with children expected to be harder hit than others. Even though the exchange rate vis-à-vis the euro area will be irrevocably fixed, past appreciations of the koruna are still likely to pass-through to some downward pressure on consumer prices, with the cumulative effect estimated to amount to around 1.5% up to mid-2009. In the longer run, the Balassa-Samuelson effect and other factors affecting catch-up economies may raise the Slovak inflation rate above the euro area level. As capital markets have already fully priced in euro membership, no immediate effect on short- and long-term interest rates in the wholesale markets is to be expected for January 2009. In the longer run, euro adoption can be expected to foster financial integration, thereby leading to a convergence of Slovak retail interest rates towards euro area levels. This reduction in retail interest rates will benefit the general public with mortgage borrowers likely to reap the largest benefits. A potential risk of low real interest rates is the emergence of a boom-bust cycle; prudent fiscal policy and further structural reforms, including enhanced competition, would help to counter any such developments.

English

Keywords: euro changeover, inflation, interest rate, Slovak Republic
JEL: F36: International Economics / International Finance / Financial Aspects of Economic Integration; E31: Macroeconomics and Monetary Economics / Prices, Business Fluctuations, and Cycles / Price Level; Inflation; Deflation; E43: Macroeconomics and Monetary Economics / Money and Interest Rates / Interest Rates: Determination, Term Structure, and Effects
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