Do Exchange Rates Move to Address International Macroeconomic Imbalances?

Matthew Canzoneri, Javier Vallés Liberal and José Viñals

No 1498, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper provides empirical evidence on the effectiveness of movements in nominal exchange rates in smoothing cyclical imbalances between countries, as explained by the literature on optimal currency areas. We use restrictions from the Mundell-Flemming model (on which the theory of optimal currency areas is based) to identify VAR systems that explain the exchange rate movements and the relative output movements of potential members of a European Monetary Union (EMU). We find that the shocks that cause most of the variation in relative output do not seem to result in movements in nominal exchange rates. Moreover, the shocks that explain movements in nominal exchange rates are monetary in nature, rather than real. Such results make it hard to argue that the loss of exchange rate flexibility accompanying EMU would come at a significant cost to macroeconomic stability.

Keywords: EMU; Exchange Rates; Optimal Currency Areas (search for similar items in EconPapers)
JEL-codes: E58 F33 F41 F42 (search for similar items in EconPapers)
Date: 1996-10
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Citations: View citations in EconPapers (55)

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Working Paper: Do Exchange Rate Move to Address International Macroeconomic Imbalances? (1996)
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