EMU, Adjustment, and Exchange Rate Variability

Luca Ricci and Peter Isard

No 1998/050, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; monetary union; EMU; Exchange rate variability; EMU country; EMU participant; EMU regime; regime to EMU; Exchange rates; Trade balance; Monetary unions; Exchange rate adjustments; Exchange rate flexibility (search for similar items in EconPapers)
Pages: 27
Date: 1998-01-01
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Citations: View citations in EconPapers (4)

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