Emu, Adjustment, and Exchange Rate Variability
27 Pages Posted: 15 Feb 2006
Date Written: April 1998
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: EMU, Exchange rate variability
JEL Classification: F4, F31, F33, F36
Suggested Citation: Suggested Citation