Do Exchange Rates Move to Address International Macroeconomic Imbalances?
AbstractThis paper provides empirical evidence on the effectiveness of movements in nominal exchange rates in smoothing cyclical imbalances between countries, as explained by the literature on optimal currency areas. We use restrictions from the Mundell-Flemming model (on which the theory of optimal currency areas is based) to identify VAR systems that explain the exchange rate movements and the relative output movements of potential members of a European Monetary Union (EMU). We find that the shocks that cause most of the variation in relative output do not seem to result in movements in nominal exchange rates. Moreover, the shocks that explain movements in nominal exchange rates are monetary in nature, rather than real. Such results make it hard to argue that the loss of exchange rate flexibility accompanying EMU would come at a significant cost to macroeconomic stability.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1498.
Date of creation: Oct 1996
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Other versions of this item:
- Matthew B. Canzoneri & Javier Vallés & José Viñals, 1996. "Do Exchange Rate Move to Address International Macroeconomic Imbalances?," Banco de Espaï¿½a Working Papers 9626, Banco de Espa�a.
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
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