Road to EMU: Do we need a flexible exchange rate?

The authors consider the current exchange-rate regime in the Czech Republic as the Czech economy prepares for entry into the EU and the EMU. The macro economic impacts of a single-currency regime are classified according to tr aditional OCA theory. Using quantitative measures, the authors find the deg ree of macroeconomic convergence between the Czech and German (EU) economie s sufficient enough to preclude major obstacles to the implementation of a fixed-currency regime in the Czech Republic. Also examined are the transiti onal specifics of the Czech economy. The paper analyzes the real appreciati on of the Czech currency and its competitiveness and finds that the develop ment of cost factors exert depreciationary pressures on the exchange rate. Conversely, a fixed regime might alleviate problems related to the influx f oreign capital and consequent nominal appreciation-an idiosyncrasy of the C zech economy. However, once labor market rigidities are removed, a fixed re gime offers the Czech economy a basis of sustainable competitive advantage, growth, and convergence to the EU.