The Sustainability of Monetary Unions - Can the Euro Survive?
27 Pages Posted: 27 Mar 2012 Last revised: 23 Jul 2012
Date Written: March 27, 2012
This paper aims to propose a new measure of exchange market pressure for countries operating in hard peg regimes, such as currency unions, currency boards or full dollarization. We use a general model of currency crisis to derive a sustainability index based upon the relationship between the shadow exchange rate and the output gap required to maintain the currency peg. We apply the new index to European Union countries in order to assess the sustainability of the Euro.
Keywords: shadow exchange rate, currency crisis, exchange market pressure
JEL Classification: F3, F31, F41, G01
Suggested Citation: Suggested Citation