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Andrew Michael

Abstract

This paper will review how the Central Bank of Cyprus (CBC) has conducted its monetary policy since its creation in 1963 and especially since 1992 when the Cyprus pound was linked to the ECU. The CBC wants Cyprus to adopt the euro as quickly as possible after officially joining the EU on May 1, 2004. One of the arguments against adopting the euro is that a country's central bank loses direct control over its monetary policy. This paper will argue that in reality the CBC has already given up control of monetary policy even before euro adoption because its decision making simply mirrors that of the European Central Bank (ECB). In addition to the pros and cons for the EU countries of adopting a common currency, there are also benefits and dangers in adopting the euro too soon. The paper will also discuss how the ECB will find it more difficult to effectively achieve its objectives of price stability and economic growth in a euro-zone comprised of more than twenty countries that will have lost direct control of monetary policy but still have to meet the conditions of the Growth and Stability Pact.

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