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This study examines the interdependence and asymmetries in the relationships between the economic policy uncertainty and the selected financial stability variables in Europe. Specifically, the impact of uncertainty on inflation, equity returns, the euro in US dollar exchange rate and interest rates is analyzed. The results show a significant negative impact of shocks in economic policy uncertainty on equity returns in Europe during the examined January 1987 – January 2023 period. Uncertainty shocks affect inflation asymmetrically at different time intervals. Asymmetric responses of interest rates and the exchange rate to uncertainty shocks are also found. The results suggest that economic policies in Europe should encompass efforts to mitigate economic uncertainty. [ABSTRACT FROM AUTHOR]

The article focuses on the creation of a system for monetary stability in Europe. The article also discusses the contribution of the European Monetary System (EMS) to the reduction of the exchange rate volatility and the importance of capital controls for the increased volatility of interest rate differentials. It is explained in the article that the goal behind the foundation of the European Monetary System (EMS) in March 1979 was the creation of a system of monetary stability in Europe. The adoption of the EMS is attributed to the reduction of the intra-EMS nominal and real (bilateral and effective) exchange rate volatility relative to the pre-EMS period.

This paper employs a unique, hand-collected dataset of exchange rates for five major currencies (the lira of Barcelona, the pound sterling of England, the pond groot of Flanders, the florin of Florence and the livre tournois of France) to consider whether the law of one price and purchasing power parity held in Europe during the late fourteenth and early fifteenth centuries. Using single series and panel unit root and stationarity tests and cointegration analysis on 10 real exchange rates between 1383 and 1411, we show that the parity relationship held for the pound sterling and some of the Florentine florin series individually and for almost all of the groups that we investigate. Our findings add to the weight of evidence that trading and arbitrage activities stopped real exchange rates deviating permanently from fair values. This research extends the results reported in other studies back more than 600 years. [ABSTRACT FROM AUTHOR]

Using self-exciting threshold autoregressive models, we explore the validity of the law of one price (LOOP) for sixteen sectors in nine European countries. We find strong evidence of nonlinear mean reversion in deviations from the LOOP and highlight the importance of modelling the real exchange rate in a nonlinear fashion in an attempt to measure speeds of real exchange rate adjustment. Using the US dollar as a reference currency, the half-lives of sectoral real exchange rate shocks, calculated by Monte Carlo integration, imply much faster adjustment than the 'consensus' half-life estimates of three to five years. The results also imply that transaction costs vary significantly across sectors and countries. [ABSTRACT FROM AUTHOR]

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This article presents an overview of this issue in relation to the periodical's twentieth anniversary. The author discusses the organization of a anniversary panel in London, England to mark the occasion, and to review articles from the history of the periodical focusing on economic-policy development during these 20 years. The article also provides an introduction to other articles presented in this issue, including one concerning the evolution of exchange-rate management, the effects of government debts on interest rates, and higher education reform in Europe.

The appetite for fiscal discipline has been steadily declining among most industrial countries. In the past, fiscal profligacy would have been punished by markets with higher interest rates and, in some cases, also exchange rate depreciation. However, in post-EMU Europe, exchange rate markets no longer discipline the fiscal behaviour of national governments. Perhaps more crucially, even the interest rate punishment to fiscal indiscipline is highly uncertain, with academic opinions being quite divided on this issue. This paper takes a close look at the link between fiscal policy and interest rates in the European context. The key finding is that an expansionary fiscal policy in one EMU member will have an effect both on its spreads and on the overall level of interest rates for the currency union as a whole, with the second effect, however, being quantitatively much more significant. This suggests that there are indeed substantial spillovers, through the interest rate channel, among fiscal policies of member countries. To limit countries' incentive to run expansionary fiscal policies, a set of rules, like those embedded in the Stability and Growth Pact, is then needed. Some (weak) evidence is also found that after EMU, interest rate spillovers seem to be more significant for high debt countries with unsustainable fiscal policies, reflecting perhaps market concerns about a possible sovereign bail out or the impact of financial distress. There may be a case then for imposing tighter rules on high debt countries. [ABSTRACT FROM AUTHOR]

Exchange rate pass-through in a set of euro area prices along the pricing chain is examined in this paper. First, a vector autoregression (VAR) approach is used to analyze the joint time-series behavior of the euro exchange rate and a system of area-wide prices in response to an exchange rate shock. Second, the impulse-response functions from the VAR estimates are used to identify—in a ‘new open-economy macroeconomics model’—the key behavioral parameters that best replicate the pattern of exchange rate pass-through in the euro area. A key finding is that traded goods—both extra-area exports and imports—behave as though they are predominately priced in euros. The area-wide findings are compared with those for other major industrial economies. [ABSTRACT FROM AUTHOR]

We investigate international monetary-policy transmission under different exchange-rate and capital-account regimes in eleven small, open economies during the 1980s and 1990s. We find no systematic link between ex-post monetary-policy autonomy and exchange-rate regimes. Capital controls appear to have provided a degree of temporal insulation from foreign monetary policy shocks, though not strict autonomy. The results are consistent both with short-term autonomy for small countries even under fixed exchange rates and an open capital account, and with long-term dependence under flexible exchange rates and an independent stability target. Results also indicate that euro-area market interest rates are significantly more responsive to the development of the corresponding US rate than were the previous national rates. [ABSTRACT FROM AUTHOR]

The annual structure of the real exchange rates in sixteen European countries is examined in this article by means of fractional integration techniques. The results show that the highest degree of dependence between the observations is obtained for countries Finland or Spain whereas Switzerland and the UK present the smallest orders of integration. Thus, stronger policy actions are required in the former countries to bring the variables back to their original levels. [ABSTRACT FROM AUTHOR]

In this paper, the impact of the adoption of the euro on the commercial transactions of EMU countries is investigated. It seeks to disentangle the effects of eliminating exchange rate volatility — and those of other policy factors that promote integration — from the influence of the emergence of the European currency union. Since EMU is a relatively new phenomenon, a panel estimation of the gravity equation in a dynamic framework is used in order to capture effects like trade persistence. The main finding is that the adoption of the euro has had a positive but not an exorbitant impact on bilateral trade between European countries (ranging between 9 and 10 per cent). The impact is much lower than that shown in the recent literature on a larger and heterogeneous set of countries. One reason for this divergence seems to be that the euro was adopted after decades of integration policies had already worked through in Europe. [ABSTRACT FROM AUTHOR]

This article presents information on the role played by monetary policy in economic development. The monetary conditions in the euro area are currently neutral; in other words they are not a barrier to growth equal to the expansion of potential output. The European Central Bank (ECBs) recent interventions in favor of the euro on the foreign exchange market are a signal with which the ECB supports the turnaround in the euro exchange rate expected on the basis of the economic fundamentals. Since the early November of last year the ECB has raised the refinancing rate in seven steps by a total of 2.25 percentage points to currently 4.75%. Three-month money market rates have risen to 5%, while lending rates have also increased perceptibly. The 2.25% increase in trend potential-output growth assumed for the euro area is low compared with other calculations. The International Monetary Fund, for example, estimates a 2.5% increase in potential output in the euro area. The appreciation of the euro has failed to materialize. In fact the euro has depreciated further, especially against the US dollar.

In this article, the author used a large cross-country panel data set to show that two countries with the same currency trade more than comparable countries with their own currencies. Much more, perhaps over three times as much. While lower exchange rate volatility also increases trade, the effect of a common currency appears to be an order of magnitude larger than that of eliminating exchange rate volatility but retaining separate currencies. The effect of a common currency on trade is an important issue. The increase in trade stemming from a common currency is one of the few undisputed gains from European Economic and Monetary Union (EMU). Even substituting a single currency for several national currencies reduces the transactions costs of trade within that group of countries. This was one of the official motivations behind the EMU project. If a common currency substantially increases trade, there will be important repercussions.

Aims to shed light on the choice of exchange rate system facing Finland and Sweden by using theories of optimum currency areas as framework. Review of theories dealing with optimum currency areas; Relationship of Finland and Sweden and between these two countries and other industrial countries; Advantages of a Finnish-Swedish monetary union over membership within the European Monetary Union.

A currency area is an arrangement for a group of countries to peg exchange rates among distinct national currencies. In some cases, exchange rates may be rigidly pegged, but more usually they are allowed to fluctuate within narrow bands. Members retain their own central banks, although with serious constraints on the independence of national monetary policies. A currency union involves a much stronger political and institutional commitment to fix exchange rates absolutely through a single money that functions as the monetary standard for a group of countries. The supporting institutional structure also includes a common monetary authority for all the countries of the union which determines monetary policy on a union-wide basis. the desire of several countries to be solid members of the Exchange Rate Mechanism and, more recently, to be founding participants in European Monetary Union (EMU) has provided political leverage to improve national economic policies. If EMU is to be assured a reasonable chance for success, the national authorities whose policies have generated the social welfare problem need to step forward to take full responsibility for the necessary reform.

The gold standard was a system of fixed exchange rates that offered little opportunity for carrying out monetary policies, short of suspending gold convertibility. Trade integration and capital mobility were very high. It is worthwhile asking whether there are useful lessons to draw for EMU from European experience during that period. One clear lesson is that debts matter. Another basic finding is that the stability of the European gold standard depended on the underlying price trend. Deflation prior to 1895 resulted in rising public debt burdens, which forced some countries to leave the system. Once gold was discovered and deflation gave way to inflation, real interest service fell, debts grew more slowly and a high degree of convergence allowed most countries to return to gold. For EMU, this result implies that stability will hinge on the ECB's policy not being too restrictive. Other lessons concern the fragility of institutions in the face of deep public finance difficulties, the risks for the single market of leaving out countries that have not fully converged, and the existence of a virtuous cycle including low real interest rates, fast growth and debt reduction. [ABSTRACT FROM AUTHOR]

This paper examines the behaviour of exchange rates prior m and since the inception of the European Monetary System (EMS). Movements in bilateral European exchange rates tend to be associated with fluctuations in the dollar. In particular the mark tends to appreciate against other European curren- cies when the dollar depreciates. Further, most realignments of currencies in the EMS have generally occurred after sharp movements in the dollar. Conventional explanations relying on portfolio diversification by investors do not seem to explain the facts fully. A more satisfactory explanation is provided by the existence of capital controls. These limit the mobility of assets and ensure an asymmetric response by European cur- rencies to movements in the dollar. These capital controls are, in the absence of coordinated monetary policy, essential to the smooth working of the EMS. However at the same time they limit the scope for the further integration of European capital markets. Thus the EMS is not a step on the road to greater financial integration. Indeed it is a cul-de-sac. [ABSTRACT FROM AUTHOR]

Comments on the paper of economist Hans Genberg analyzing the role of exchange rate policies in offering guidance to the economic policy-makers. Impact of the correlation between monetary integration or degree of stability of exchange rates and financial integration or liberalization of capital movements on the potential gains from the integration; Effect of the current account imbalance between Germany and the rest of Europe on the economic growth of Europe.