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Real exchange-rate changes in the European community: The empirical evidence and its implications for European currency unification

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  • Roland Vaubel

Abstract

Is the European Community (EC) (already) a desirable currency area? There are two kinds of reasons why it may not. The first reason is that national propensities to inflate may be too different within the EC to permit the aboundonment of exchange-rate changes. Nominal exchange-rate changes are required to make differences in national monetary policies possible as well as to compensate for the resulting differences in the prices of tradable goods and services. The argument is political rather than economic in nature; what is in doubt is essentially the political will of member governments to agree en a common rate of inflation and not so much the economic feasability of such a procedure. - However, there are also economists who have argued that harmonisatian of national inflation rates is likely to produce economic losses, i.e. needless unemployment in sane member countries and needless inflation in others. The assumption that is common to them is that there is a long-run trade -off between inflation and unemployment and that this trade-off (the so-called Phillips curve) is different in different member countries. The validity of these Keynesian assumptions is disputed by modern monetarist theory and refuted by the experience of inflation in this decade: as money illusion is eroded in the process of inflation, the trade-off disappears Governments, it is true, may still be under the Phillips illusion. But this is not to say that inflationrate differentials in the 'Community are an economic rather than a political obstacle to currency unification.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by Springer in its journal Weltwirtschaftliches Archiv.

Volume (Year): 112 (1976)
Issue (Month): 3 (September)
Pages: 429-470

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Handle: RePEc:spr:weltar:v:112:y:1976:i:3:p:429-470

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Cited by:
  1. Roman Horváth, 2005. "Exchange Rate Variability, Pressures and Optimum Currency Area Criteria: Implications for the Central and Eastern European Countries," Working Papers IES 78, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
  2. Banerji, Ranadev, 1976. "Technology, economies of scale and average size of industrial plants: Some further cross-country evidence," Kiel Working Papers 50, Kiel Institute for the World Economy.
  3. Sell, Friedrich L., 1999. "Die EWWU als Club: Positive und normative Implikationen für den Beitritt mittel- und osteuropäischer Reformstaaten ; Beitrag für den Projektbericht: Währungspolitische Optionen für die mittel- un," Working Papers in Economics 1999,4, Universität der Bundeswehr München, Economic Research Group.
  4. Monika Blaszkiewicz-Schwartzman, 2007. "Explaining Exchange Rate Movements in New Member States of the European Union: Nominal and Real Convergence," Money Macro and Finance (MMF) Research Group Conference 2006 144, Money Macro and Finance Research Group.
  5. Weimann, Marco, 2002. "OCA theory and EMU eastern enlargement: An empirical application," Dresden Discussion Paper Series in Economics 07/02, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  6. Sell, Friedrich L., 2001. "Braucht es monetäre und reale Konvergenz für eine (in einer) Währungsunion? Anmerkungen zu einer aktuellen Debatte," Working Papers in Economics 2001,1, Universität der Bundeswehr München, Economic Research Group.
  7. Muhammad Nasir & Wasim Malik, 2011. "Structural Decomposition of Exchange Rate Shocks in Pakistan: An Empirical Investigation using SVAR Methodology," Transition Studies Review, Springer, vol. 18(1), pages 124-138, September.
  8. Phouphet Kyophilavong & Muhammad Shahbaz & Gazi Salah Uddin, 2014. "A Note on Nominal and Real Devaluation in Laos," Working Papers 2014-446, Department of Research, Ipag Business School.
  9. Gammadigbé, Vigninou, 2013. "Endogénéité des critères d'une zone monétaire optimale: un réexamen
    [Endogeneity of the optimum currency area criteria: a re-examination]
    ," MPRA Paper 46727, University Library of Munich, Germany.
  10. Michal SKOREPA, 2013. "Troubles in the Euro Area Periphery: The View through the Lens of a Simple Convergence-Sensitive Optimum Currency Area Index," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(2), pages 129-151, May.
  11. George Demopoulos & Nicholas Yannacopoulos, 1999. "Conditions for Optimality of a Currency Area," Open Economies Review, Springer, vol. 10(3), pages 289-303, July.
  12. Bahmani-Oskooee, Mohsen & Hegerty, Scott W. & Kutan, Ali M., 2008. "Do nominal devaluations lead to real devaluations? Evidence from 89 countries," International Review of Economics & Finance, Elsevier, vol. 17(4), pages 644-670, October.
  13. Shu-ki Tsang, 2002. "Optimum Currency Area for Mainland HCina and Hong Kong? Empirical Tests," Working Papers 162002, Hong Kong Institute for Monetary Research.
  14. Bahmani-Oskooee, Mohsen & Miteza, Ilir, 2002. "Do nominal devaluations lead to real devaluations in LDCs?," Economics Letters, Elsevier, vol. 74(3), pages 385-391, February.
  15. Monika Blaszkiewicz & Przemyslaw Wozniak, 2003. "Do Candidate Countries Fit the Optimum-Currency-Area Criteria?," CASE Network Studies and Analyses 0267, CASE-Center for Social and Economic Research.
  16. Roman Horvath, 2005. "Exchange Rate Variability, Pressures and Optimum Currency Area Criteria: Lessons for the Central and Eastern European Countries," Working Papers 2005/08, Czech National Bank, Research Department.
  17. Wolter, Frank, 1977. "Perspectives for the international location of the steel industry," Kiel Working Papers 60, Kiel Institute for the World Economy.
  18. Weeber, Joachim, 2012. "Konstruktionsfehler von festen Wechselkurssystemen: Die Europäische Währungsunion als Musterbeispiel?," Arbeitspapiere der Nordakademie 2012-06, Nordakademie - Hochschule der Wirtschaft.
  19. Kang-Soek Lee & Philippe Saucier, 2011. "Should the UK Join the Euro Zone? Evidence from a Synthetic OCA Assessment," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 8(1), pages 77-96, June.
  20. Artatrana Ratha, 2010. "Does Devaluation work for India?," Economics Bulletin, AccessEcon, vol. 30(1), pages 247-264.
  21. repec:ebl:ecbull:v:30:y:2010:i:1:p:247-264 is not listed on IDEAS

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