Working Paper Series, Department of Economics, Uppsala University
No 2003:29:
Booms and Busts in EMU
Nils Gottfries ()
Abstract: A floating exchange rate combined with a clear inflation
target can be a powerful stabilizer even if there are fluctuations in
exchange rates that are unrelated to current fundamentals. Under plausible
conditions, most of the stabilisation will occur through the exchange rate,
and fundamental shocks will generate considerable medium term exchange rate
volatility. The consequences of asymmetric shocks inside EMU are worse than
envisaged in early analyses of the EMU project such as Calmfors et al.
(1997). Inflation and real interest rate differentials arise which magnify
the imbalances and cause boom-bust cycles in the member countries.
Keywords: optimal currency area; imperfect competition; interest parity; real interest rate; (follow links to similar papers)
JEL-Codes: E31; E32; E42; F41; (follow links to similar papers)
35 pages, December 9, 2003
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