Abstract
After achieving substantial progress in establishing a common customs territory and regulations, customs unions face potential disruptions due to a lack of monetary policy coordination. These disruptions might appear in the form of currency shocks and the ensuing trade conflicts. We approach this issue by looking at the case of the Eurasian Economic Union (EAEU). The volatility of national currencies in 2014–2015 resulted in sizable shifts in competitiveness, culminating in a currency crisis in some member states. This raises the questions of how to gradually achieve a more coordinated monetary policy, what monetary policy options are available, and what would be their relative impact on macroeconomic stability. Using a set of modeling tools and econometric models, we review three monetary regimes, which represent moves from fully independent exchange rate policy through increased policy coordination to joint exchange rate setting.
Highlights
Despite widespread skepticism towards Eurasian economic integration, the five countries of the Eurasian Economic Union (EAEU) have far achieved a cer tain degree of success
What are the monetary policy options for a customs union facing currency shocks and trade disruptions? We approach this problem through the lens of the newest addition to the family of customs unions — the Eurasian Economic Union
We discuss and simulate the performance of various monetary policy rules representing different levels of monetary cooperation among EAEU economies. These rules are as follows: (i) a baseline rule representing a monetary policy re action to inflation and, to a lesser extent, to the USD exchange rate; (ii) an intermediate rule, which extends the baseline rule in such a way that monetary policy reacts to the Russian ruble exchange rate; and (iii) a peg rule under which exchange rates are fixed to a basket of EAEU currencies
Summary
Despite widespread skepticism towards Eurasian economic integration, the five countries of the Eurasian Economic Union (EAEU) have far achieved a cer tain degree of success. A single market with no common monetary policy could lead to imbalances and misalignments related to financial instabili ty (e.g., multiplication of contagion and spillover effects, beggar-thy-neighbor exchange rate policies, and non-desirable arbitrage capital flows because of dif ferences in inflation levels and interest rates). These are the problems of a customs union facing potential dis ruptions due to a lack of monetary policy coordination.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
