DP298 | The Exchange-Rate Question in Europe

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01/01/1989

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Abstract

This paper reviews the arguments for and against monetary unification in Europe, taking into account the recent shift in emphasis in discussions of exchange rate regimes. It discusses the merits of irrevocably fixed versus flexible exchange rates in the light of the literature on international strategic interactions, where inefficiencies arise from countries' incentives to run beggar-thy-neighbor policies. The long run level of inflation is viewed as determined by the 'credibility' of the monetary authorities: the choice of the exchange rate regime modifies the constraints faced by monetary authorities and may thus modify the equilibrium inflation rate.