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Alternative Paths Towards EMU: Lessons from an Expanded Mundell-Fleming Model for the Accession Countries

  • Lúcio Vinhas de Souza
  • Elisabeth Ledrut

A small expectations-expanded "Mundell-Fleming" model is built for the European Union Accession Countries and estimated to assess the optimality of different exchange rate regimes (a peg and a float) through a simple welfare function. Floating appears as the best option for most of the countries in our sample, and this conclusion is robust to changes in the weights of the welfare function. The "shock absorbing" qualities of the regimes for different types of innovations is assessed via a VAR and a structural model, and here again the float seems to outperform a harder regime, in the emergence of temporary shocks.

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1132.

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Length: 22 pages
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:kie:kieliw:1132
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  1. Lars E O Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Bank of England working papers 56, Bank of England.
  2. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions be Expansionary? Tales of Two Small European Countries," NBER Working Papers 3372, National Bureau of Economic Research, Inc.
  3. Maurice Obstfeld, 2003. "International Macroeconomics: Beyond the Mundell-Fleming Model," International Finance 0303006, EconWPA.
  4. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  5. Ivan Roberts & Rod Tyers, 2003. "China's Exchange Rate Policy: The Case for Greater Flexibility," Asian Economic Journal, East Asian Economic Association, vol. 17(2), pages 155-184, 06.
  6. Bofinger, Peter & Wollmershäuser, Timo, 2001. "Is there a third way to EMU for the EU accession countries?," Munich Reprints in Economics 20209, University of Munich, Department of Economics.
  7. Jens Hölscher & Lúcio Vinhas de Souza, 2001. "Exchange rate strategies of new EU entrants," Chapters, in: European Monetary Integration, chapter 9 Edward Elgar.
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