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Monetary Union and the Interest-Exchange Rate Trade-off

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F. Bohn

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Abstract

By using a multi-country simulation model this paper analyzes the qualitative effects of joining a monetary union. The transition to EMU (European Monetary Union) is shown to produce interest and exchange rate changes with substantial and countervailing effects on the real economy which can be traced through the model. Observable anticipation effects in the wake of the EMU are substantiated; and some policy recommendations for joining any monetary union are derived. It is also shown that fixing conversion rates at last-day market rates produces a unique outcome and not exchange rate indeterminacy as argued by de Grauwe (1997), Obstfeld (1998), and others.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 554.

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Date of creation: 04 May 2003
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Handle: RePEc:esx:essedp:554

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. De Grauwe, Paul, 1997. "The Indeterminacy of the Euro Conversion Rates. Why it Matters and How it can be Solved," CEPR Discussion Papers 1677, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Obstfeld, Maurice, 1998. "A strategy for launching the Euro," European Economic Review, Elsevier, vol. 42(6), pages 975-1007, June. [Downloadable!] (restricted)
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  3. Van Aarle B. & Engwerda J.C. & Plasmans J. & Weeren A., 1999. "Macroeconomic policy interaction under EMU : a dynamie game approach," Working Papers 1999020, University of Antwerp, Faculty of Applied Economics. [Downloadable!]
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  4. Fair, Ray C & Taylor, John B, 1983. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 51(4), pages 1169-85, July. [Downloadable!] (restricted)
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  5. Paul R. Masson & Guy Meredith & Steven A. Symansky, 1990. "MULTIMOD Mark II: A Revised and Extended Model," IMF Occasional Papers 71, International Monetary Fund.
  6. De Grauwe, Paul & Dewachter, Hans & Veestraeten, Dirk, 1999. "Price dynamics under stochastic process switching: some extensions and an application to EMU1," Journal of International Money and Finance, Elsevier, vol. 18(2), pages 195-224, February. [Downloadable!] (restricted)
  7. Jürgen Hagen & Stefan Lutz, 1996. "Fiscal and monetary policy on the way to EMU," Open Economies Review, Springer, vol. 7(4), pages 299-325, October. [Downloadable!] (restricted)
  8. Hughes Hallett, A J & Vines, D, 1993. "On the Possible Costs of European Monetary Union," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 61(1), pages 35-64, March.
  9. Mitchell, Peter R. & Sault, Joanne E. & Smith, Peter N. & Wallis, Kenneth F., 1998. "Comparing global economic models," Economic Modelling, Elsevier, vol. 15(1), pages 1-48, January. [Downloadable!] (restricted)
  10. Frank Bohn, 2002. "Fiscal Consolidations, but when? Italy and EMU Enlargement," Economics Discussion Papers 544, University of Essex, Department of Economics. [Downloadable!]
  11. Paul Masson & Jacques Melitz, 1991. "Fiscal policy independence in a European Monetary Union," Open Economies Review, Springer, vol. 2(2), pages 113-136, June. [Downloadable!] (restricted)
  12. Hughes Hallett, Andrew & McAdam, Peter, 1996. "Fiscal Deficit Reductions in Line with the Maastricht Criteria for Monetary Union: An Empirical Analysis," CEPR Discussion Papers 1351, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. Krugman, P., 1993. "What Do We Need to Know About the International Monetary System?," Princeton Studies in International Economics 190, International Economics Section, Departement of Economics Princeton University,.
  14. Fielding, David & Shields, Kalvinder, 2001. "Modelling macroeconomic shocks in the CFA Franc Zone," Journal of Development Economics, Elsevier, vol. 66(1), pages 199-223, October. [Downloadable!] (restricted)
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  1. Joseph Plasmans & Jacob Engwerda & Bas Aarle & Tomasz Michalak, 2009. "Analysis of a monetary union enlargement in the framework of linear-quadratic differential games," International Economics and Economic Policy, Springer, vol. 6(2), pages 135-156, July. [Downloadable!] (restricted)
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