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Vicious and Virtuous Circles and the Optica Proposal: A Two-Country Analysis

In: One Money for Europe

Author

Listed:
  • Giorgio Basevi
  • Paul Grauwe

Abstract

In a recent article we have tried to present the theory on which a proposal for managing exchange rates among countries of the European Community—the so-called OPTICA proposal—is based.1 Important limitations of our study resulted from the fact that the analysis was conducted in a one-country model and it was not explicitly made dynamic. Thus, at least two weak spots were left in the paper. First, we could only suggest the hypothesis, but not analyse it, that vicious and virtuous circles could reinforce or dampen each other when two countries were confronted. Secondly, we were—wrongly, as we shall show in this paper—induced to ‘prove’ that the OPTICA intervention guidelines could impede real adjustment when a country needed to let its terms of trade fall (its ‘real exchange rate’ rise). We were, therefore, admitting that the OPTICA proposal might be open, on this side, to criticism.2

Suggested Citation

  • Giorgio Basevi & Paul Grauwe, 1978. "Vicious and Virtuous Circles and the Optica Proposal: A Two-Country Analysis," Palgrave Macmillan Books, in: Michele Fratianni & Theo Peeters (ed.), One Money for Europe, chapter 7, pages 144-163, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-04308-8_7
    DOI: 10.1007/978-1-349-04308-8_7
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