Soft Versus Hard Targets for Exchange-Rate InterventionExchange-rate intervention by monetary authorities should defend a band, centred not at the spot exchange rate, but at a moving average of its recent values. This target zone is soft, in that it allows greater short-run flexibility, but it is also rigorous: it still precludes any sustained easing of monetary policy. Such a rule has many advantages over ‘hard’ target zones for the spot exchange rate. In particular, it increases resilience against speculative attacks, especially when any shocks to exchange-rate fundamentals are transitory, without compromising long-run discipline.

ERM Bandwiths for EMU and After: Evidence from Foreign Exchange OptionsAre the wide bands adopted in the summer of 1993 too large? The official answer is that wide bands offer protection against speculative pressure, while exchange rates may be kept within narrower margins at the discretion of the authorities. Yet, if exchange-rate fixity and predictability are desirable, as is implicitly assumed by the existence of the bands, there must exist a trade-off between protection against speculative pressure and predictability. In that case, the bandwidth should be as narrow as possible, yet unlikely to be challenged by the markets. This paper offers estimates of ‘safe’ bandwidths. For the long-term member currencies (French franc, peseta, Danish krone and escudo), the existing 15% bands are unnecessarily wide; narrower 3.5% bands would capture at least 95% of expected exchange-rate realisations over a three-month horizon. For the lira, Finnish markka and Swedish krone, wider bands of 5–6% would capture a similar proportion of the distribution. The pound’s exchange rate expectations are the most dispersed, requiring 8.4% bands to capture 95% of exchange-rate expectations.

Reforming Corporate Governance: Redirecting the European AgendaCorporate governance reform is high on the European policy agenda. This article warns against partial and hastily conceived interventions in complex and fragile governance arrangements. Reformers should step back and analyse the fundamental links between corporate law and corporate finance, and between corporate governance and the rest of the economic and legal system. Reform efforts should not meddle with specific ownership and control structures. Particular problems, e.g. the poor liquidity of some stock markets and poor protection of minorities in some countries, should be addressed directly. Fundamental reform of corporate governance is probably desirable in certain countries, but will require far-reaching, and country-specific, changes in the economic system. Reform is thus best handled at the level of individual member states. Initiatives to harmonize the structure and control of corporations at the EU level are bound to fail, and the prospects for specific proposals like the European Company Statute are bleak at best. A European Commission ‘Corporate Governance Policy’ should focus instead on promoting transparency and the dissemination of information.

The Costs and Benefits of EU Enlargement: The Impact on the EU and Central EuropeEastern enlargement of the EU is a central pillar in Europe’s post-Cold War architecture. Keeping the Eastern countries out of the EU would seriously endanger their economic transition, and economic failure in the East could threaten peace and prosperity in Western Europe. The perceived economic costs and benefits will dictate timing. There are four parts to the enlargement calculus – the costs and the benefits in the East, and in the West. This article breaks new ground in estimating these costs and benefits using simulations in a global applied-general-equilibrium model. The analysis includes a scenario in which joining the EU significantly reduces the risk premium on investment in the East – with resulting huge benefits to the new entrants. A review of the existing literature on the EU budget costs leads to a surprisingly well-determined ‘consensus’ estimate, supported by a new political-economy analysis of the budget. The bottom line is unambiguous and strongly positive: enlargement would be a very good deal for both the existing and new members.

Foreign Direct Investment, Political Resentment and the Privatization Process in Eastern EuropeFDI in Eastern Europe has been disappointingly low. The paper argues that a significant reason is eastern-country reluctance to make existing assets available for foreign investors. The paper proposes a participation model to mitigate some of the resentments against FDI. Foreign investors should be invited to compete for special joint-venture contracts, with the government bringing in existing assets and receiving non-voting stocks. Foreign investors contribute capital and know-how, receive voting shares and gain full operational control. There are several advantages over cash sales of assets to foreigners. First, the participation model eases microeconomic and macroeconomic stock-flow problems, thus increasing asset prices and enabling more foreign investment. Second, by keeping some stake, transition countries can participate in the risk premium. Third, the model enables governments to hand over their shares to households and thus to create private collateral on which new small businesses can grow. Fourth, and most important, compared to cash sales, auctioning of participation contracts promises higher privatization revenues if governments are unable to assess investors’ knowledge and abilities. This reduces the risk of selling the family silver too cheaply and should alleviate the potential resentment on the part of the host countries.

Economic Policy is published by Blackwell Publishers. It is available from: Blackwell Publishers Journals. See box page 15 for ordering information.