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Why do estimates of the European Monetary Union (EMU) effect on trade vary so greatly? Rose (2017) shows that the largest factor determining the size of EMU trade estimates is the choice of sample, with studies using only European or rich countries finding smaller impacts than those using more complete trade datasets. I push this question one step further, asking instead: what is the appropriate comparison group with which to study the euro's trade impact? Using a first stage estimation of selection into the EMU and a robust propensity score weighting estimator, I extend the work of Millimet and Tchernis (2009) to a larger dataset of countries and years, showing that gravity estimates of the euro effect on trade are smaller when sample truncation and weighting brings the differences in observable characteristics between EMU and non-EMU pairs close to zero. Utilizing a Poisson pseudo-maximum likelihood approach, I find that estimates using this more robust estimator reflect the same pattern, but with significantly less initial upward bias. My work suggests that policy analysis in trade should be more careful to consider the comparability of "treated" and "control" observations, and more readily utilize propensity score methods as a data driven approach to rebalancing samples when differences across these groups are large. [ABSTRACT FROM AUTHOR]

Over the years, policymakers have explored various combinations of varying degrees of monetary policy independence, exchange rate stability, and financial openness while recognizing that not all three policies can be achieved to the fullest extent – the "monetary trilemma" hypothesis. In recent years, holding international reserves (IR) has become an important policy instrument as a buffer or insurance against liquidity shortages. Significant and fundamental economic events such as currency crises have often changed the policy mix. In this paper, we find that countries' policy mixes have been diverse and varied over time from the perspective of the trilemma and also IR holding. We then illustrate how the combination of the three trilemma policies and IR holding drastically changed before and after the Asian Financial Crisis (AFC). However, the Global Financial Crisis did not lead to a drastic change in the policy arrangements. We find that countries that faced large terms of trade shocks or negative economic growth during the crisis increase IR holding in the post-AFC. Countries that had negative growth during the crisis also tend to pursue more exchange rate flexibility and more open financial markets. This characteristic is true for commodity exporters, but not for manufacturing exporters. Countries with large current account deficit (i.e., "large capital borrowers") tend to be more sensitive to economic growth at the time of the AFC. Countries that are under IMF stabilization programs or those with sovereign wealth funds tend to hold more IR. These characteristics were not found in the aftermath of the GFC. In general, countries increased their IR holdings after the GFC, but did not respond to the during-crisis economic and institutional conditions. [ABSTRACT FROM AUTHOR]

A simple statistical method is used to identify what domestic and external variables the monetary authorities in different countries have succeeded in stabilising, in each year over the period 1974–2017. The findings emphasise the shift over time from exchange rate to domestic variable (mainly price) stabilisations, and from cases where no variable is stabilised on the criteria used and inflation is 5% or higher, to cases where no variable is stabilised but inflation is constrained to be below 5%. The stabilisations identified are also compared with a recent classification of countries' monetary policy frameworks, which has a different approach and different sources: the overlaps are considerable but incomplete. The association between the different stabilisations and economic performance in terms of inflation and growth is then examined, through both unconditional and conditional analyses. The clearest finding is that constrained no overall stabilisation is associated with better performance than unconstrained no overall stabilisation, and typically with as good performance as price stabilisation. It is suggested that good macroeconomic outcomes can be obtained in the context of a variety of stabilisations, provided the monetary authorities are 'serious about inflation'. [ABSTRACT FROM AUTHOR]

Recent sanctions on the use of Russia's international reserve assets seem likely to reduce the appeal of US dollar reserves as a ?shock absorber? for international payments. But international reserves are also a means to reassure foreign investors that problematic countries will not confiscate their investments. The collateral motive for holding dollar reserves has been enhanced by the demonstration that the United States is willing and able to sanction misbehavior. Geopolitically risky countries now more than ever need to reassure foreign investors that their investments are safe from expropriation. We conclude that recent events will strengthen the role of the dollar as the key international reserve currency. [ABSTRACT FROM AUTHOR]

This paper studies the effect of seven types of exchange rate regimes on business cycle synchronization, by using a new dataset on bilateral de-facto exchange rate regimes for the 1973-2016 period. Using the extreme bounds analysis (EBA) methodology, we find that the exchange rate regime is a robust determinant of business cycle synchronization. We find that, compared to country pairs with freely floating arrangements, (i) the correlation coefficient measuring business cycle synchronization is higher by approximately 0.07-0.12 points in countries with no separate legal tenders; (ii) the effect does not always linearly decrease with increasing exchange rate regime flexibility, since the effects of crawling pegs and crawling bands turn out to be insignificant, whereas that of moving bands as a more flexible type of exchange rate regime is positive and significant; and (iii) the effect is stronger for countries with a high degree of financial openness and good institutional quality. The second finding suggests that the role of intermediate exchange rate regimes is more complicated than previously recognized in the literature and deserves more attention. In addition, we find that (iv) the positive effect of interest is more prominent for countries from the high-income group, in contrast to the occasionally negative effect of some regimes for other country pairs, and that (v) specialization and fiscal policy integration are factors that influence the effect of exchange rate regimes on business cycle synchronization. [ABSTRACT FROM AUTHOR]

The Covid 19 pandemic spawned a global liquidity crisis in March 2020. The global liquidity crisis was alleviated by the Federal Reserve and other advanced country central banks cooperating by extending the swap lines they developed in the Global Financial Crisis 2007–2008. Central bank cooperation in 2020 evolved from a two-century history across several monetary regimes that is surveyed in this paper. I find that in monetary regimes which are rules-based cooperation was most successful. International currency swaps developed to manage exchange rates during the Bretton Woods era have evolved into the leading tool to manage international liquidity crises. The swap network can be viewed as a step in the direction of a global financial safety net. [ABSTRACT FROM AUTHOR]

We estimate the impact of the extensity of macroprudential policies on the correlation of the policy interest rates between the center economies (CEs, i.e., the U.S., Japan, and the Euro area), and the peripheral economies (PHs). We find a more extensive implementation of macroprudential policies would lead PHs to (re)gain monetary independence from the CEs when the CEs implement expansionary monetary policy; when PHs run current account deficit; when they hold lower levels of international reserves; when their financial markets are relatively closed; when they are experiencing an increase in net portfolio flows; and when they are experiencing credit expansion. [ABSTRACT FROM AUTHOR]

This paper revisits the fear of floating hypotheses for eight African countries from the collapse of the Bretton Woods fixed exchange rate system in the early 1970s up until December 2017. This long period of calendar time allows us to extend previous studies by examining the fear of floating hypotheses in two distinct ways. First, we look at a set of descriptive statistics to compare the degree of exchange rate flexibility under alternative de jure exchange rate regimes. We find no statistical difference between exchange volatility between declared floaters and fixers, but greater reserve volatility between the floaters, which is suggestive of fear of floating. Second, we use a non-linear, threshold VAR model, estimated for each country, to test for a relationship between exchange rate changes and reserve changes. The results suggest some evidence of a fear of floating for countries which have declared a de jure floating regime, with the regime-dependent impulse responses indicating that exchange rate appreciation due to positive reserve shocks is more prevalent in the high reserve regimes, indicative that level of foreign reserves available are important for their exchange rate policies. In general, although the countries with de jure floating regimes have a lower threshold than those with pegged regimes, reserves adjust by more than the exchange rates showing a fear of floating. [ABSTRACT FROM AUTHOR]

This paper argues that the key deep underlying fundamental for the growing international imbalances leading to the collapse of the Bretton Woods system between 1971 and 1973 was rising U.S. inflation since 1965. It was driven in turn by expansionary fiscal and monetary policies ---the elephant in the room. What was kept in the background at the Camp David meeting on August 15, 1971 when President Richard Nixon closed the U.S. gold window, as well as imposing a 10 % surcharge on all imports and a ninety day wage price freeze—was that U.S. inflation, driven by macro policies, was the main problem facing the Bretton Woods System, and that for political and doctrinal reasons was not directly addressed. Instead President Nixon blamed the rest of the world rather than correcting mistaken U.S. policies. In addition, at the urging of Federal Reserve Chairman Arthur F. Burns, Nixon adopted wage and price controls to mask the inflation, hence punting the problem into the future. This paper revisits the story of the collapse of the Bretton Woods system and the origins of the Great Inflation. Based on historical narratives and conversations with the Honorable George P. Shultz, a crucial player in the events of the period 1969 to 1973, I argue the case that the pursuit of sound monetary and fiscal policies could have avoided much of the turmoil in the waning years of Bretton Woods. Moreover, I point out some of the similarities between the imbalances of the 1960s and 1970s—especially fiscal and the use of tariff protection as a strategic tool, as well as some differences—relatively stable monetary policy and floating exchange rates. [ABSTRACT FROM AUTHOR]

This paper contributes to the debate on the magnitude of exchange rate elasticities by providing a set of price and quantity elasticities for 51 advanced and emerging-market economies. Specifically, we report for each of these countries the elasticity of trade prices and trade quantities on the export and on the import side, as well as the reaction of the trade balance. To this aim, the paper uses a large unified database of highly disaggregated bilateral trade flows, covering 5000 products and more than 160 trading partners. We present a range of estimates using not only standard regression techniques but also generated regressors that aim to uncover changes in the exchange rate elasticities due to unobserved marginal costs and competitor prices in the importing market. Our results show that quantity elasticities are significantly below one, pass-through is incomplete and export prices react significantly to exchange rate changes. In spite of low quantity elasticities, the trade balance reacts positively to a depreciation in all countries because export and import prices adjust. Overall, our findings suggest that exchange rate changes can play an important role in addressing global trade imbalances. [ABSTRACT FROM AUTHOR]

A majority of countries neither freely float their currencies nor firmly peg. But most of the remainder in practice also don't obey such well-defined intermediate exchange rate regimes as target zones. This paper proposes to define an intermediate regime, to be called "systematic managed floating," as an arrangement where the central bank regularly responds to changes in total exchange market pressure by allowing some fraction to be reflected as a change in the exchange rate and the remaining fraction to be absorbed as a change in foreign exchange reserves. An operational criterion for judging systematic managed floaters is a high correlation between exchange rate changes and reserve changes. The paper rejects the view that exchange rate regimes make no difference. In regressions to test effects on real exchange rates, we find that positive external shocks tend to cause real appreciation for most systematic managed-floaters; more strongly so for pure floaters; and not at all for most firm peggers. Two measures of exogenous external shocks are used: (i) for commodity-exporters, a country-specific index of global prices of the export commodities and (ii) for other Asian emerging market economies, the VIX. [ABSTRACT FROM AUTHOR]

This paper studies two issues of countries’ exchange rate regime (ERR) choices: why countries peg and, if they peg, how they choose their anchor currency. Previous studies focus on the use of country-specific factors to explain countries’ exchange rate regime choices. However, though some papers found strong correlation between idiosyncratic factors and ERR choices, these factors cannot fully explain the contemporary movement of the choices. It is possible that large swings in regime choices are caused by network effects: a few countries change their ERR and other countries follow. If this snowball effect is true for countries’ decisions, we should be able to observe spatial autocorrelations among countries’ ERR choices. Using spatial analysis, we found that countries are likely to follow the ERRs of other countries, and countries’ ERRs are jointly determined by network effects and country-specific factors. The findings indicate that countries may achieve higher welfare by jointly choosing their ERRs with their major partners through cooperation and negotiation. [ABSTRACT FROM AUTHOR]

Monetary aggregates have a special role under the “two pillar strategy” of the ECB. Hence, a theoretically consistent measure of monetary aggregates for the European Monetary Union (EMU) is needed. This paper analyzes aggregation over monetary assets for the EMU. We aggregate over the monetary services for the eleven EMU (EMU-11) countries, which include Estonia, Finland, France, Germany, Ireland, Italy, Luxembourg, Malta, Netherlands, Slovakia, and Slovenia. We adopt the Divisia monetary aggregation approach, which is consistent with index number theory and microeconomic aggregation theory. The result is a multilateral Divisia monetary aggregate, in accordance with Barnett (J Econ 136(2):457-482, 2007). The multilateral Divisia monetary aggregate for the EMU-11 is found to be more informative and a better signal of economic trends than the corresponding simple sum aggregate. We then analyze substitutability among monetary assets for the EMU-11 within the framework of a representative consumer’s utility function, using Barnett’s (J Bus Econ Stat 1:7-23, 1983) locally flexible functional form, the minflex Laurent indirect utility function. The analysis of elasticities with respect to the asset’s user-cost prices shows that: (i) transaction balances and deposits with agreed maturity are income elastic and (ii) the monetary assets are not good substitutes for each other within the EMU-11. Simple sum monetary aggregation assumes that component assets are perfect substitutes. Hence simple sum aggregation distorts measurement of the monetary aggregate. The ECB provides Divisia monetary aggregates to the Governing Council at its meetings, but not to the public. Our European Divisia monetary aggregates will be expanded and refined, in collaboration with Wenjuan Chen at the Humboldt University of Berlin, to a complete EMU Divisia monetary aggregates database to be supplied to the public by the Center for Financial Stability in New York City. [ABSTRACT FROM AUTHOR]

Larger data sets, with more countries and a longer span of time, exhibit systematically larger effects of European monetary union on trade. I establish this stylized fact with meta-analysis and confirm it by estimating a plain-vanilla gravity model. I then explain this finding by examining systematic biases in 'multilateral resistance to trade' manifest in time-varying country fixed effects; bias grows as the sample is truncated by dropping small poor countries. [ABSTRACT FROM AUTHOR]

Governments have a number of policy tools that can be used to address pressure on the balance of payments, threatening an undesirable decline in the relative value of the national currency. They can: (1) sell reserves, (2) raise interest rates, (3) impose capital controls, (4) apply trade restrictions, or (5) depreciate the currency. While researchers typically analyze these policies in isolation from one another, we treat them as a menu of options available to election-minded politicians. We analyze the use of these five policy responses to payments difficulties for a large sample of countries since the early 1970s. We argue that governments try to minimize political costs by adopting less transparent policies first and only moving to more visible policies as necessary, delaying the most visible and politically costly policies until after elections. The evidence is consistent with these claims: governments are more likely to draw down reserves and impose capital controls before other options. If these policies do not succeed, they tend to raise interest rates. If further action is needed, they delay devaluations and trade protection until after elections. [ABSTRACT FROM AUTHOR]

This paper empirically investigates the impacts of domestic and external factors along with exchange rate regimes (ERRs) on business cycles in a large panel of advanced and emerging market economies (EME). The results for classical business cycles suggest that EME tend to experience much deeper recessions and relatively steeper expansions during almost the same duration. The probability of expansions significantly increases with ERR flexibility. Our results strongly support floating ERR for both advanced and EME other than the East Asian countries. The impacts of external real and financial shocks and domestic variables are significantly greater under managed regimes as compared to floats. Consistent with an argument that high saving rates enhance the ability of a country to maintain an ERR, managed regimes performs better only in the East Asian countries. Supporting the de-coupling literature, external cycles become insignificant for growth under flexible ERR. Our results strongly suggest that the evolution and determinants of both classical business and growth cycles are not invariant to the prevailing ERR. [ABSTRACT FROM AUTHOR]

We study how the optimal degree of conservatism relates to decision-making procedures in a Monetary Policy Committee (MPC). In our framework, central bank conservatism is required to attenuate the volatility of monetary decisions generated by the presence of uncertainty about the committee members' output objective. We show how this need for conservatism varies according to the number of MPC members, the MPC's composition as well as its decision rule. Moreover, we find that extra central bank conservatism is required when there is ambiguity about the MPC's true decision rule. [ABSTRACT FROM AUTHOR]

Using data on 78 countries over 1980 to 2008 and a host of controls, this paper finds that switching from a floating regime to a pegged or an intermediate regime is likely to substantially reduce unemployment. Using a three-way regime classification, the estimated effect of switching to a pegged (to an intermediate) regime is around two percentage points (around one percentage point) after 2 years. These results are robust to variations in both specification and three-way classification. When using a four-way classification, we find evidence that switching from a float to a hard peg is most likely to reduce unemployment. [ABSTRACT FROM AUTHOR]

The stationarity of OECD real exchange rates over the period 1972-2008 is tested using a panel of 26 member countries. The methodology followed stems from the need to meet several key concerns: (i) the identification of which panel members are stationary; (ii) the presence of cross-sectional dependence among the countries in the panel; and (iii) the identification of potential structural breaks that might have occurred at different points in time. To address these concerns, we employ a recent test that examines the time series properties of the data within a panel framework, namely the Hadri and Rao (Oxford Bulletin of Economics and Statistics 70: 245-269, ) panel stationarity test. The real exchange rates of the 26 OECD countries are found to be stationary when considered as a panel, but only after allowing for endogenously-determined structural breaks and cross section dependence. We also find that once these structural breaks are removed from the underlying series, the half-life of shocks to the real exchange rate is much shorter than has been calculated in earlier studies. [ABSTRACT FROM AUTHOR]

We look at the exchange rate policy choices and outcomes for small rich economies. Small rich economies face significant policy challenges due to proportionately greater economic volatility than larger economies. These economies usually choose some form of fixed exchange rate regime, particularly in the very small economies where the per capita cost of independent monetary policy is relatively high. When such countries do choose a free or managed floating regime, they appear to derive no benefit from those regimes; their exchange rate volatility seems to rise without any significant change in fundamental economic volatility. Thus, for these countries, floating exchange rates seem to create problems for policy makers without solving any. [ABSTRACT FROM AUTHOR]

The three exchange rate regimes adopted by Italy from 1883 up to the eve of World War I - the gold standard (1883-1893), floating rates (1894-1902), and 'gold shadowing' (1903-1911)-produced a puzzling result: formal adherence to the gold standard ended in failure while shadowing the gold standard proved very successful. This paper discusses the main policies underlying Italy's performance particularly focusing on the strategy of reserve accumulation. It presents a cointegration analysis identifying a distinct co-movement between exchange rate, reserves, and banknotes that holds over the three sub-periods of the sample. Given this long-run relationship, the different performance in each regime is explained by the diversity of policy measures, reflected in the different variables adjusting the system in the various regimes. Italy's variegated experience during the gold standard provides a valuable lesson about current developments in the international scenario, showing the central role of fundamentals and consistent policies. [ABSTRACT FROM AUTHOR]

In the decade since its creation in 1999, the European Economic and Monetary Union (EMU) has experienced surprisingly large and persistent inflation differentials across member states causing substantial shifts in relative price levels. At the same time, member countries exhibited distinct non-synchronized output fluctuations, giving rise to a pattern of 'rotating slumps' (a term coined by Olivier Blanchard). This paper presents a stylized theoretical model of a monetary union which demonstrates how inflation differentials and relative output movements interact dynamically. A number of implications are derived from the model. In particular, national fiscal policies are shown to have an important role in containing internal macroeconomic disparities in a monetary union. An optimal fiscal policy rule is derived from the model for that purpose. [ABSTRACT FROM AUTHOR]

The global financial crisis, the weakening role of the dollar and the increasing international importance of China are calling for a reform of the international monetary system in the direction of greater multilateralism. To this end, we advance a proposal based on a greater role of the Special Drawing Rights (SDRs) and focus on the potential benefits that these could bring to Low-Income Countries (LICs). SDRs would be created exogenously - with a disproportionate allocation to LICs -, but also endogenously, through a substitution account and an overdraft facility. Finally, the paper discusses the superiority of this proposal in the context of the current foreign assistance framework. [ABSTRACT FROM AUTHOR]

Does it pay to issue an international money? Should a government promote internationalization of its currency? And if so, how might policy makers shape cross-border use to maximize net gains? The aim of this essay is to address these old questions anew, in hopes of providing clearer insight into the strategic calculus involved. Scholars have debated the net benefits or costs of currency internationalization for decades. Yet despite much sound and fury little analytical consensus exists. The conventional literature is marred by at least three critical defects, which might be called the three M's-Misconceptions, Misplaced Concreteness, and outright Mistakes. A proper appreciation of the three M's, I endeavor to show, can take us a long way toward getting the calculus right. [ABSTRACT FROM AUTHOR]

In deciding whether to support an international role of their country's currency, national policymakers are often influenced by lobbying from domestic sectoral groups. While these groups will be consistently more interested in some implications of international currency issuance than others, their specific preferences are likely to be highly context specific. Looking at the cases of the United States and China, we anticipate that domestic sectoral lobbying is unlikely to pressure either the US government to defend the dollar's international role vigorously or the Chinese government to internationalize the renminbi fully. From this domestic sectoral perspective, the future looks to be characterized by reluctant monetary leaders rather than increasingly aggressive currency competition between the United States and China. [ABSTRACT FROM AUTHOR]

Ever since the setting up of the EMU, many scholars have argued that the Euro will take its place alongside the dollar and perhaps even replace it as international money. The theory behind this point of view is represented by search-theoretic models. The fundamental shortcoming of the traditional version of these models is that they fail to make a distinction between different types of money, in particular between commodity money and fiduciary money. In the international context a fiduciary money can be accepted only when a political exchange is possible between a leading country which has an interest in producing trust in the future value of its currency and other countries which attach no importance to the relative gains the issuing country acquires by exploiting the privilege of seigniorage. The Bretton Woods system and the dollar standard, although based on fiduciary monies, have worked thanks to the institutional framework maintained by the United States and accepted by other countries. Unlike the United States, the euro area is not in a position to exercise any form of political leadership on the international scene. As things stand the euro does not represent a threat to the dollar and it is bound to remain a regional money. [ABSTRACT FROM AUTHOR]

This paper provides new evidence on the rise of the dollar as an international currency, focusing on its role in the conduct of trade and the provision of trade credit. We show that the shift to the dollar occurred much earlier than conventionally supposed: during and immediately after World War I. Not just market forces but also policy support-the Fed in its role as market maker-was important for the dollar's overtaking of sterling as the leading international currency. On balance, this experience challenges the popular notion of international currency status as being determined mainly by market size. It suggests that the popular image of strongly increasing returns and pervasive network externalities leaving room for only one monetary technology is misleading. [ABSTRACT FROM AUTHOR]

We discuss three well known plans that were offered in the twentieth century to provide an artificial replacement for gold and key currencies as international reserves: Keynes' Bancor, the SDR and the Ecu(predecessor to the euro).The latter two of these reserve substitutes were institutionalized but neither replaced the dollar as the principal medium of international reserve. [ABSTRACT FROM AUTHOR]

This paper investigates the relationship between the political and economic aspects of monetary unions. After illustrating the recent change in approach to the theory of optimum currency areas (section 2), the paper analyzes the momentous implications of union members maintaining political sovereignty (section 3) for the notion of currency area optimality and the viability of monetary unions (section 4). [ABSTRACT FROM AUTHOR]

This paper examines which emerging market regions form optimum currency areas (OCAs) by assessing the symmetry of macroeconomic shocks. We extend the output-prices-VAR framework by adding net exports and the real effective exchange rate as endogenous variables. Based on theoretical considerations, we derive which shocks affect these variables in the long run: shocks to labor productivity, foreign trade, labor supply, and money supply. The considered economies of Central and Eastern Europe, the Commonwealth of Independent States, East and Southeast Asia, and South Asia, exhibit large enough shock symmetry to form a currency union; the economies of Africa, Latin America, and the Middle East do not. [ABSTRACT FROM AUTHOR]

Using different levels of regional aggregation, we compare Europe with the USA and Canada as regards business cycle synchronization and core-periphery patterns. A long annual sample (1950-2005) makes it possible to study how these aspects have evolved over time. Results support the economic viability of EMU. Average cyclical correlations among European countries have risen significantly, reaching levels close to those of North American regions. Applying fuzzy clustering to the analysis of core-periphery issues, we find European countries to actually outperform USA Census Regions: the core-periphery divide is milder, and peripheral status seems generally less protracted. [ABSTRACT FROM AUTHOR]

This paper examines the effects of the Economic and Monetary Union on demand for foreign reserves. The traditional theory on demand for international reserves assigns a pivotal role to imports. However, in a currency union part of imports are settled in the common currency, leaving no incentive for keeping foreign reserves. Moreover, the pooling of the demand for reserves in the currency union and an increasing role of a currency as an international reserve currency may also influence, among other things, the union demand for reserves. Based on estimated demand functions for reserves it is shown that the Economic and Monetary Union has reduced the demand for reserves substantially. It is argued that an enlargement with new member countries of the European Union will result in further savings of reserves. A simple calculation at the end of the paper illustrates the welfare gain associated with the reduced need of reserves in the Economic and Monetary Union. [ABSTRACT FROM AUTHOR]

This paper attempts to determine the environments that market confidence might play a significant role in the collapse of the Bretton Woods system. We build a game-theoretic model of currency crises where a continuum of small speculators can decide their market confidence and trading positions. In the model, the convertibility of dollar is assumed to exhibit a long-term downtrend due to Triffin’s dilemma. The problem is analyzed on the grounds of both certainty and uncertainty. In the certainty case, we find that if the convertibility of dollar is low enough, a dollar crisis is inevitable, but if the convertibility is in an intermediate range with multiple equilibria, the Bretton Woods system is vulnerable to self-fulfilling speculation. In the uncertainty case, the incidence of the confidence crises will disproportionately increase as the convertibility of dollar falls. Lastly, this paper shows that the Federal Reserve Bank’s secrecy may extend the maximum lifespan of the Bretton Woods system. [ABSTRACT FROM AUTHOR]

The article discusses the global financial crisis and the foundation of Euro and the European Central Bank (ECB). It mentions several reasons for the crisis, including rapid expansion of credit to the U.S. household, increasing leverages and exposure of the U.S. banking system, and possibly the filing of bankruptcy by Lehman Brothers Inc. It states that the ECB is responding to the crisis by distributing liquidity to banking sector, and lowering interest rates.

We revisit Friedman’s case for flexible exchange rates in a small open economy with several distortions and rigidities and a variety of domestic and external shocks. We find that, for external shocks, the flexible exchange rate regime outperforms the fixed regime independent of the source of domestic nominal rigidities provided that the monetary authorities pursue a policy of strict inflation targeting. For domestic supply shocks, a joint policy of a flexible exchange rate and strict inflation targeting fares well when the main source of nominal rigidities is in the domestic goods markets, but not if rigidities arise in the labor markets. [ABSTRACT FROM AUTHOR]

The article discusses the governance issues of the Eurosystem. It states that the main reason for the banking crisis was the progressive deregulation of banking systems in the U.S. and Europe, that allowed the commercial banks to take on the activities of investment banks. It mentions that there was a major failure of bank supervision in the Eurozone, its responsibilities remained assigned to national regulators, as European Central Bank was not assigned explicitly.

We extend irrelevance results of sticky prices and fixed exchange rates to environments with sticky wages. Provided payroll taxes can be used with the same flexibility as monetary policy, then sticky wages are irrelevant for both optimal allocations and policies in response to shocks. This is the case also under fixed exchange rates or in a monetary union. [ABSTRACT FROM AUTHOR]

This paper compares the credibility of exchange rate arrangements for the five African countries which are members of the Community of Portuguese Speaking Countries and will be referred to as Afro-Luso. Our working hypothesis is that credibility necessarily implies low mean exchange market pressure (EMP), low EMP conditional volatility and low-severity EMP crises under financial-market integration. In addition, economic fundamentals must account for EMP dynamics. We also seek evidence of a risk–return relationship for mean EMP and of “bad news” (negative shocks) having a greater impact on EMP volatility than “good news” (positive shocks). Using our econometric models, we are able to rank Afro-Luso countries’ conditional volatility in ordinal terms. Our main conclusion is that countries with currency pegs, such as Guinea-Bissau (GB) and Cape Verde (CV), clearly have lower volatility when compared to those with managed floats and are therefore more credible. Moreover, EMP crises episodes under pegs are much less severe. We find that economic fundamentals correctly account for mean EMP in all countries and that the risk–return relationship is much more favourable for investors under currency pegs, as the increase in volatility is lower for the same rate of return. The exception to this finding is Mozambique (MOZ), which apparently has a risk–return profile akin to that enjoyed by countries with pegs. A plausible reason is that MOZ has the only managed float in our sample implementing monetary and exchange rate policy within the confines of an IMF framework, which establishes floors for international reserves and ceilings for the central bank’s net domestic assets. This intuition needs to be tested, however. EMP conditional volatility, meanwhile, is generally driven by changes in domestic credit (lowers it) and foreign reserve changes (raises it). The first effect is more pronounced under currency pegs, but also under MOZ’s managed float. “Bad news” increases volatility more that “good news” only in the case of CV’s currency peg, which we take to be another sign of its credibility. A few striking cross-country comparisons also emerge in our analysis. Among countries with managed floats, Angola (ANG) has the most severe EMP crises, MOZ the least severe and São Tomé & Príncipe (STP) lies between the two extremes but closer to MOZ. [ABSTRACT FROM AUTHOR]

We present an analysis of the determinants of de jure and de facto exchange rate regimes based on a panel probit model with simultaneous equations. The model is estimated using simulation-based maximum likelihood methods. The empirical results suggest a triangular structure of the model such that the choice of de facto regimes depends on the choice of de jure regimes but not vice versa. This gives rise to a novel interpretation of regime discrepancies. [ABSTRACT FROM AUTHOR]

This paper considers whether an intra regional currency basket and the associated divergence indicators could play a useful role in official exchange rate surveillance. Recently, proponents of an Asian currency basket have referred to the role the European Currency Unit played in constructing exchange rate divergence indicators as evidence of the usefulness of intra regional currency baskets for exchange rate monitoring. The paper shows that such indicators have a number of features that can lead to them obscuring underlying changes in exchange rates and that the signals they emit will often be difficult to interpret. In addition, the use of regional currency baskets for surveillance can lead to potentially serious N − 1 problems in circumstances when there is not agreement about which regional currencies will be the anchor currencies. [ABSTRACT FROM AUTHOR]

We adapt the basic principles of the Keynes Plan and argue for the creation of a supranational bank money (SBM) that would coexist along side national currencies and for the establishment of a new international clearing union (NICU). These principles remain timely because the fundamental causes of the instability of the international monetary system are as valid today as they were in the early forties. The new supranational money would be created against domestic earning assets of the Fed and the ECB and its quantity would be demand-driven. Our proposal is not an agreement on exchange rates, which while possible is not essential to the functioning of the SBM. NICU would not hold open positions in assets denominated in national currency and consequently would not bear exchange rate risk. NICU would be more than an office recording credit and debit entries of the supranational bank money. The financial tsunami that hit the world economy in 2007–2008 provides a unique opportunity for a coordinated strategy. [ABSTRACT FROM AUTHOR]

The paper reviews the arguments for and against monetary union among the six members of the Gulf Cooperation Council—the United Arab Emirates, the State of Bahrain, the Kingdom of Saudi Arabia, the Sultanate of Oman, the State of Qatar and the State of Kuwait. Both technical economic arguments and political economy considerations are discussed. I conclude that there is an economic case for GCC monetary union, but that it is not overwhelming. The lack of economic integration among the GCC members is striking. Without anything approaching the free movement of goods, services, capital and persons among the six GCC member countries, the case for monetary union is mainly based on the small size of all GCC members other than Saudi Arabia, and their high degree of openness. Indeed, even without the creation of a monetary union, there could be significant advantages to all GCC members, from both an economic and a security perspective, from greater economic integration, through the creation of a true common market for goods, services, capital and labour, and from deeper political integration. The political arguments against monetary union at this juncture appear overwhelming, however. The absence of effective supranational political institutions encompassing the six GCC members means that there could be no effective political accountability of the GCC central bank. The surrender of political sovereignty inherent in joining a monetary union would therefore not be perceived as legitimate by an increasingly politically sophisticated citizenry. I believe that monetary union among the GCC members will occur only as part of a broad and broadly based movement towards far-reaching political integration. And there is little evidence of that as yet. [ABSTRACT FROM AUTHOR]

We examine the implications of monetary union for macroeconomic stabilization in catching-up participating countries. We allow member states’ supply conditions to differ, especially with regard to sectoral characteristics. Sectoral productivity shocks of the type associated with the Balassa–Samuelson effect tend to hamper the stabilization properties of a currency union. In the face of aggregate supply disturbances, the stabilization costs of renouncing monetary autonomy diminish with a steeper supply curve (as induced by higher trade openness) and—barring idiosyncratic shocks—with a larger reference country size, more homogeneous supply slopes and a higher preference for price stability. [ABSTRACT FROM AUTHOR]

The paper attempts to evaluate the prospect of creating a currency union in the “Greater China” economic area. Despite of the political deadlock and military confrontation in the Taiwan Strait, the Greater China area has experienced rapid and spontaneous regional integration in the past decades as a result of increasingly cross-border trade, foreign direct investment (FDI), technology contracts, and other arrangements in accordance with changes in comparative advantage and industrial upgrading in these economies. In this study, we focus on the symmetry in shocks that is perceived as one of the major preconditions of a currency union. In contrast to the previous studies, we investigate the time-varying correlation of supply, REER and monetary shocks by using the Kalman filter technique to assess the dynamic changes in structural similarity and convergence among the Greater China economies. We also examine the costs of forming a currency union in the area due to the loss of monetary autonomy in each economy. Our results suggest that there is a rising structural symmetry between the Greater China economies, and this area has become increasingly a better candidate for a monetary union. [ABSTRACT FROM AUTHOR]

This paper investigates the interaction between institutional integration and trade deepening in the EU over the last 50 years. It uses Granger causality tests, a VECM and variance decompositions to further the understanding of this interaction. The evidence indicates two-way endogeneity. But the link from institution building to trade dominates. Yet, this link has weakened over time, possibly due to globalisation sidestepping institutions. Moreover, the sensitivity of institutional integration to trade deepening has risen, which suggests that economic forces have gained more strength in determining institutional steps. [ABSTRACT FROM AUTHOR]

Three main features characterize the international financial integration of China and India. First, while only having a small global share of privately-held external assets and liabilities, these countries are large holders of official reserves. Second, their international balance sheets are highly asymmetric: both are “short equity, long debt.” Third, China and India have improved their net external positions over the last decade although neoclassical models would predict them to be net borrowers. We argue that domestic financial policies are key to understanding these patterns and the future role of China in the international financial system. [ABSTRACT FROM AUTHOR]

In a fixed exchange rate regime, an exchange rate change can be a swift way to change the real exchange rate in the short run. Fiscal policy also affects relative prices, and fiscal policy response to various types of shocks can therefore be crucial for the credibility of an exchange rate peg. We develop a model within which fiscal policy plays a crucial role for ensuring the viability and thus credibility of an exchange rate peg. We use the insights of this model to take a closer look at Denmark, which has successfully pursued a fixed exchange rate policy since 1982. [ABSTRACT FROM AUTHOR]