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Fear of Floating and the External Effects of Currency Unions

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  • Thomas Plümper
  • Vera E. Troeger

Abstract

The introduction of the Euro has considerably affected the de facto monetary policy autonomy – defined as statistical independence from monetary policy in the key currency areas – in countries outside the European Currency Union. Using a standard open economy framework we argue that de facto monetary policy autonomy has significantly declined for countries that dominantly trade with the ECU and slightly increased that dominantly trade with the Dollar-Zone. The predictions of our model find support in the data. We estimate the influence of the Bundesbank/ECB’s and the Fed’s monetary policies on various country groups. The de facto monetary policy autonomy of both non-Euro EU-members and EFTA countries declined with the introduction of Euro. This effect was slightly stronger for the EU member countries than for EFTA countries as our theory predicts. At the same time, the de facto monetary policy autonomy of Australia and New Zealand vis-à-vis the US Dollar has (moderately) increased. This finding also supports our theoretical model.

Suggested Citation

  • Thomas Plümper & Vera E. Troeger, 2006. "Fear of Floating and the External Effects of Currency Unions," The Institute for International Integration Studies Discussion Paper Series iiisdp181, IIIS.
  • Handle: RePEc:iis:dispap:iiisdp181
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