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Currency convertibility will play a major role in the economic
transition in Eastern Europe and many alternative institutional options
have been proposed to attain this difficult objective. In Discussion
Paper No. 545, Research Fellow Peter Bofinger shows that these
countries' early transition to convertibility is critical to the success
of their real sector reforms, but it will only be sustainable if
existing flow and stock disequilibria are removed. Both flexible rates
and the proposed East European Payments Union entail severe drawbacks.
Bofinger therefore focuses on fixed-rate solutions, and he finds that
governments may considerably enhance both the credibility of their
commitment to the exchange rate and internal financial stringency by
transferring all monetary policy competencies to a supranational
institution based on the blueprint of the European System of Central
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