EMU, Adjustment, and Exchange Rate Variability

EMU, Adjustment, and Exchange Rate Variability

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This paper uses a three-country, three-good, factor-specific model of trade with wage rigidities to investigate how European Monetary Union (EMU) is likely to affect exchange rate variability. Focusing on international macroeconomic adjustment under both exogenous and optimizing monetary policies, it shows that the relative variability (against external currencies) of the euro (under EMU) and a basket of present currencies (pre-EMU) depends on relative sizes and specialization patterns of EMU countries and the relative importance of different shocks. EMU is likely to decrease (increase) exchange rate variability for shocks to industries in which large (small) EMU countries are specialized.presence of such interactions does not reverse the results derived in the absence of optimizing monetary policy. ... Thus, in considering how the variability of the exchange rate of the U.S. dollar versus the euro after EMU will compare with the anbsp;...

Title:EMU, Adjustment, and Exchange Rate Variability
Author:Mr. Luca Antonio Ricci, Mr. Peter Isard
Publisher:International Monetary Fund - 1998-01-01


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