Internal and External Implications of EMU
SourceEconomic Systems, 25, 2, (2001), pp. 127-148
Article / Letter to editor
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Economische theorie en economisch beleid
SubjectInstitutional Shifts in Government and Governance in a Comparative and International Context
With the introduction of Economic and Monetary Union (EMU), the sovereignty of national monetary institutions has been replaced by a common monetary institution, the European Central Bank (ECB) and national currencies have been replaced by a common currency, the euro. EMU therefore implies the loss of national monetary policy autonomy and internal exchange rate flexibility inside the EMU-area. However, external exchange rate adjustment, that is, adjustment of the euro exchange rate, remains a feasible adjustment mechanism. This paper analyses how internal and external exchange rate flexibility affect macroeconomic adjustment in EMU and non-EMU countries. To do so, a model is constructed in which three countries interact: two countries that decide to form a monetary union and a third country that does not participate in the monetary union. Numerical simulations of a representative example are used to characterise the adjustment dynamics induced by monetary and fiscal policies before and after the start of the EMU.
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