Is there a third way to EMU for the EU accession countries?

Peter Bofinger () and Timo Wollmershäuser

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: The actual mainstream view of academics emphasizes the so-called \"two-corner solution\" with either completely fixed or independently floating exchange rates. We will argue in this paper that the requirements for fixed rates are rather too restrictive to be successful. On the other hand, the advantage of an independent float is only valid for small open economies under the assumption of exchange rate movements closely related to movements in the fundamentals. We suggest as a \"third way\", a strategy of flexible exchange rate targeting where central banks simultaneously manage interest rates and exchange rates in a way that guarantees both the achievement of domestic macroeconomic objectives and an equilibrium on the international financial markets.

Date: 2001
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Published in Economic Systems 3 25(2001): pp. 253-274

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