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There is only a sparse literature on the determination of real exchange rate volatility, and little attention has been given to the possible impact of EMU on volatility of real exchange rates of EU countries. A number of papers suggest a negative impact of exchange rate volatility on investment or growth, for advanced as well as developing countries, although we note that price and wage adjustment that might link to real exchange rate volatility is also part of the adjustment mechanism to macroeconomic shocks in EMU. We assess whether an effect of EMU on conditional volatility of real effective exchange rates can be detected, both for EMU and non EMU members. We find that the advent of EMU was accompanied by a reduction in conditional real exchange rate volatility for most EMU countries, as well as Sweden and Denmark that did not join EMU, but did not lead to a reduction in real rate volatility for Germany, Belgium, the Netherlands, nor, outside EMU, for the UK. [ABSTRACT FROM AUTHOR]

Following entrance into the European Union, Central Eastern European Countries (CEECs) are expected to join the European Monetary Union (EMU). These countries may incur considerable costs over the course of their passing through the required Exchange Rate Mechanism II (ERM-II). However, with enough bargaining leverage, CEECs may be able to pass some of these costs on to current EMU members. In turn, a CEEC's leverage depends on its ability to wield successful brinkmanship via an exchange-rate policy characterized by a "threaten-thy-neighbor" strategy. A two-stage Nash-threat game captures the essentials of the CEECs' phase of ERM-II pass-through. [ABSTRACT FROM AUTHOR]

Over the past two decades, the process of economic and monetary union (EMU) in Europe has brought the politics of exchange rates to the forefront of the policy agenda in international relations. This article will examine the significance of exchange rate policy making in Europe by considering the creation and operation of EMU as an example of club formation. There are two major benefits from viewing the process of EMU in this way. The first is that it allows a more fruitful analysis of any potential enlargement in the membership. Second, and leading on from this, it enables conclusions to be drawn regarding the optimal eventual size of the Euro area. [ABSTRACT FROM AUTHOR]

The turmoil that engulfed the European monetary system in 1992 and 1993 extinguished the sense of inevitability that the project for economic and monetary union had acquired. The exchange rate crisis led many to conclude that monetary union had been derailed once and for all. This article argues, in contrast, that the monetary crisis did not prove that monetary union was undesired or unworkable. The travails of the exchange rate mechanism did not undo the interests that originally drove the economic and monetary union project or erase the gains it would bring to some member states. The crisis did, however, highlight the formidable obstacles to achieving monetary union in Europe. The article examines four interpretations of the 1992-3 crisis in the European monetary system, focusing especially on the failure to agree on a co-ordinated realignment that might have avoided the turmoil. It then discusses the future course of monetary union in light of the contending (though not mutually exclusive) interpretations of the crisis. Finally, it discusses the basic outlines of an economic and monetary union that might avoid some of the problems brought into relief by the exchange rate turmoil. [ABSTRACT FROM AUTHOR]