EMU, Adjustment, and Exchange Rate Variability
International Monetary Fund, Jan 1, 1998 - Business & Economics - 27 pages
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.
What people are saying - Write a review
We haven't found any reviews in the usual places.
Other editions - View all
absolute advantage analysis balance of country Bergsten bilateral exchange rate countries are specialized countries forming country 1 versus country sizes country-size or trade country-size weights demand and supply effects of EMU EMU countries EMU on exchange equal weighting scheme equation euro European Monetary Union exchange rate regimes Exchange Rate Responsiveness exchange rate variability EXOGENOUS MONEY SUPPLIES external country versus external currency flexible exchange rates forming the union hence ê homothetic industry inflation international macroeconomic adjustment labor large country loss function market clearing model of trade monetary union optimizing monetary policies paper patterns of specialization percentage changes perfect competition potential union pre-EMU regime presence of wage price equalization production function rate of country response to shocks Responsiveness Under FX sector-specific Set S2 short-run adjustment simulations small country supply shocks SW or TW trade balance trade imbalances type of shock union is specialized wage rigidities weighted average weights SW