Do Exchange Rates Move to Address International Macroeconomic Imbalances?
This 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.
|Date of creation:||Oct 1996|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:1498. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.