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The debt crisis of the eurozone revealed a structural problem of the single market rooted in the external imbalance problem of indebted member states. The assumption of this paper is that the current account imbalances within the eurozone are based on an intra-eurozone competitiveness disparity originated in the single currency and the heterogeneity of member state development. The mix of infi nite pegging and heterogeneity creates real effective exchange rate appreciation in the less competitive members, which further ruins their competitiveness in the EU.

Although the importance for successful transition of a monetary policy aiming at a sustainable price level has often been stressed in the academic literature, there is still ample room for further research into the choice of the exchange-rate system throughout the different phases of the transition process. This article deals with the question of how the choice of a specific exchange-rate system affects the economic success of a country in transition and, above all, its gradual integration into the European Union (EU) and European Monetary Union (EMU). It focuses on the transition process in five South-Eastern European countries (SEECs).

Four different schemes for classifying exchange rate regimes are compared for developing countries. Disagreements are substantial, and alternative schemes disagree as much with each other as with the official scheme. Only the official scheme shows a trend towards floating.

While there are a number of theoretical arguments in favour of capital account convertibility, or free cross-border capital mobility, in the real world cross-border trade in financial assets can in fact reduce welfare due to the effects of domestic distortions. The following paper examines the causes of the Asian financial crises of the late 1990s in this light and presents some of the lessons that would be instructive for a more effective implementation of capital account convertibility.

This paper analyses currency options for six Pacific states - Fiji, Papua New Guinea, Samoa, Solomon Islands, Tonga and Vanuatu – that issue their own currencies. Empirical estimates indicate that these states already stabilize their currencies against the US dollar because of their large and increasing trade with emerging Asia which denominates its trade in US dollars. Building on the theory of an optimal peg, we argue that the replacement of present currencies by the US dollar would strengthen these countries’ trade. Gravity model estimations indicate that adopting a common external currency would be a major stimulus to Pacific trade. While the Australian dollar has been suggested because of the Pacific’s traditional trade relations with Australia this choice would be the result of a reverse causality bias. A binary choice method is applied to trace endogeneity biases in the Pacific sample. The gains for trade from the adoption of an external currency are lower but remain positive.

The paper scrutinizes the role of wages and capital flows for competitiveness in the new EU member states in the context of real convergence. For this purpose it extends the seminal Balassa-Samuelson model by international capital markets. The augmented Balassa-Samuelson model is linked to the monetary overinvestment theories of Wicksell and Hayek in order to trace cyclical deviations of real exchange rates from the productivity-driven equilibrium path. Panel estimations for the period from 1993 to 2008 reveal mixed evidence for the role of capital markets for both the economic catch-up process and international competitiveness of the Central and Eastern European countries.

CESifo Working Paper No. 2255; International audience; The aim of this paper is to apply recently developed panel cointegration techniques proposed by Pedroni (1999, 2004) and generalized by Banerjee and Carrion-i-Silvestre (2006) to examine the robustness of the PPP concept for a sample of 80 developed and developing countries. We find that strong PPP is verified for OECD countries and weak PPP for MENA countries. However in African, Asian, Latin American and Central and Eastern European countries, PPP does not seem relevant to characterize the long-run behavior of the real exchange rate. Further investigations indicate that the nature of the exchange rate regime doesn't condition the validity of PPP which is more easily accepted in countries with high than low inflation.

The paper analyzes the relation between institutional quality, such as corruption, in a country and its monetary regime. It is shown that a credibly fixed exchange rate to a low inflation country, like a currency board, can reduce corruption and improve the fiscal system. A monetary union, however, has ambiguous effects. I find that there is convergence between countries with regard to the level of corruption.

This paper develops a two-country model to investigate the circumstances under which it is beneficial to participate in a currency area. It captures both the real and monetary arguments suggested by the optimum currency area literature in a simple monetary model of trade with nominal rigidities. The net benefits that one country expects from participation in a currency union increase with: the correlation of real shocks between countries; the degree of international labor mobility; the degree of adjustment provided by a fiscal tool; the difference between the inflationary bias of the domestic authority and the inflationary bias of the authority of the currency union; the variability of domestic monetary shocks; the extent of the deadweight and efficiency gains deriving from the adoption of a single currency. The same net benefits decrease with: the variability of real shocks; the variability of foreign monetary shocks; and the correlation of monetary shocks between countries. The effect of the degree of openness on the net benefits is ambiguous. This last result contrasts with the usual argument that the more open economies are the better candidates they make for a currency area.

The author investigates the quantitative importance of the expenditure-switching effect by developing and estimating a structural sticky-price model nesting both producer currency pricing (PCP) and local currency pricing (LCP) settings. The author aims to provide empirical evidence of the magnitude of the benefits to be gained from exchange rate flexibility in terms of expenditure switching, and to contribute to the ongoing debate regarding the optimal exchange rate regime. In the author's model, the size of the expenditure-switching effect is determined by the degree of price stickiness, the fraction of firms employing PCP versus LCP, the distribution margin, and the elasticity of substitution between domestic and foreign tradable goods. The model is estimated for three small open economies: Australia, Canada, and the United Kingdom. The empirical results suggest that, among the three countries, the magnitude of the expenditure switching by domestic agents is relatively small for the United Kingdom, and comparatively large for Canada; the distribution margin in the United Kingdom is exceptionally high, which limits the degree of domestic expenditure switching initiated by nominal exchange rate movements. Moreover, expenditure switching by foreign distributors is comparatively small for Australia and Canada, since a larger fraction of Australian and Canadian firms adopt LCP for their export price-setting., L'auteure s'attache à mesurer l'ampleur des transferts de dépenses imputables aux variations du taux de change. Pour ce faire, elle élabore et estime un modèle structurel à prix rigides autorisant une facturation dans la monnaie des pays producteurs et dans celle des pays importateurs. Elle s'efforce de recueillir des indications empiriques sur la valeur des avantages que procureraient les régimes de changes flottants en favorisant des transferts de dépenses. Elle entend prendre ainsi part au débat en cours sur le choix d'un régime de change optimal. Dans le modèle, la taille des transferts de dépenses dépend du degré de rigidité des prix, de la proportion des entreprises qui fixent leurs prix dans la monnaie de leur pays d'attache plutôt que dans celle de leurs clients étrangers, de la marge de distribution et du niveau de substituabilité des biens échangeables produits localement et importés. L'auteure estime son modèle pour trois petites économies ouvertes : l'Australie, le Canada et le Royaume-Uni. Selon les résultats empiriques, les transferts de dépenses des agents nationaux sont plutôt faibles au Royaume-Uni, mais relativement importants au Canada; la marge de distribution étant particulièrement élevée au Royaume-Uni, l'ampleur des transferts de dépenses attribuables aux variations du taux de change nominal s'y trouve limitée. En Australie et au Canada, les transferts dont sont responsables les distributeurs étrangers sont plutôt modestes, car une bonne partie des entreprises résidentes facturent leurs exportations dans la monnaie des pays importateurs.

The paper explores the interaction between debt crises and devaluation. Since the optimal level of devaluation in a crisis depends on the level of debt that has to be serviced, a default makes a devaluation less likely. Expected devaluation depends thus on expectations about default which is also a function of the type of policymaker. Therefore, the decision to devalue can be forced upon the government by adverse expectations about default and the type of policymaker in office. I also explore how these uncertainties affect the policymaker's choice of exchange rate regime.

'Die europäischen Reformländer weisen mit einem bedeutenden Exportanteil am BIP einen hohen Offenheitsgrad auf. Volkswirtschaften dieses Typs können vom System fester Wechselkurse insofern profitieren, als Beschäftigungs- und Einkommensverluste durch nominale Kursschwankungen vermieden werden können. Voraussetzung ist allerdings, daß sie eine solide Stabilitätspolitik praktizieren, ausgedrückt in niedrigen Inflationsraten und geringen Inflationsdifferentialen, was nur teilweise gelungen ist. Daher wurde die Politik fester Wechselkurse in den Ländern zunehmend relativiert. In der vorliegenden Arbeit werden die Voraussetzungen und Effekte einer Kursbindung aufgezeigt und die Wechselkurspolitiken in den einzelnen Ländern diskutiert. Ein Bezug zur künftigen Währungsunion mit der EU wird - soweit möglich - hergestellt.' (Textauszug) 'The European reforming countries display a high degree of economic openness, with exports accounting for a significant proportion of GDP. Economies of this type can benefit from a fixed exchange rate system in that such a system eliminates the risk of drops in employment and income due to fluctuations in the nominal value of their currencies. Fixed exchange rates, however, require the participating countries to practise a sound stability policy, expressed in low inflation rates and narrow inflation differentials, and this has not always been the case. For this reason, the policy of fixed exchange rates has been gradually relaxed in the countries in question. The present paper identifies the pre-requisites for and the effects of tied exchange rates and discusses the exchange rate policies pursued in the various countries. It also examines - as far as possible - the prospect of future monetary union with the EU.' (extract)