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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 investigates the long-run and short-run relationship between deposit euroization in twelve European post-transition economies and two determinants of deposit euroization that are under the influence of monetary policy: the exchange rate and the interest rate differential. The link between deposit euroization, exchange rates and interest rate differentials is investigated using Johansen cointegration and error correction models for each country separately. The results suggest that changes in both monetary drivers have significant effects on deposit euroization and are therefore important for explaining and fighting deposit euroization. Differences between exchange rate regimes, fixed and managed vs. floating, seem to matter for deposit euroization. [ABSTRACT FROM AUTHOR]

This article looks at the activities of the European Central Bank (ECB) in 2004. In prospect the ECB must have thought that 2004 was at last going to be the year when inflation fell back below two per cent despite the historically low level of interest rates. But no, there were just enough unexpected shocks particularly from rapidly rising oil prices in the second half of the year to keep it up above that figure. The Governing Council did not change the setting of monetary policy during the year, in the sense of altering their interest rate settings but a glance at the exchange rate movement during the year shows that the effective rate tightened by about six percentage points. While opinions vary about the equivalence of the impact of the exchange rate and the ECB interest rate on future inflation and output this is equivalent to a tightening of at least 50 basis points.

Empirical work on uncertainty and investment generally focuses on one country or one indicator of uncertainty. We extend the literature by assessing the impact of a comprehensive range of potential sources of uncertainty on aggregate business investment across the G7 using Pooled Mean Group Estimation (PMGE) and GARCH methods to model uncertainty. A significant negative long-run effect from exchange rate volatility is found for the G7 and in poolable subgroups including all four larger EU countries. Volatility of long-term interest rates has additionally influenced investment in recent years. For most estimates, a one standard deviation rise in conditional volatility leads to a 2-4 per cent fall in investment although some samples give greater declines. The results suggest inter alia that EMU is beneficial to aggregate investment, JEL no. E22, F31 [ABSTRACT FROM AUTHOR]

This paper analyzes monetary policy asymmetries in EMU participating countries. In particular, we use a structural dynamic modelling approach to investigate asymmetric monetary transmission in Europe. Asymmetries are investigated in two different ways. First, we restrict the estimated structural models reflecting the monetary constraints each country faced during the EMS period. We obtain well-behaved and comparable effects of monetary policy shocks. Second, efficiency frontiers for the selected EMU countries are estimated. In computing the optimal combinations of output gap and inflation volatility we use a weighted average of interest rate and exchange rate, i.e. the Monetary Condition Index (MCI), as a policy instrument. The impulse response analysis implemented with the MCI shows relatively small differences in the responses of the real economy to monetary policy shocks. Altogether the results suggest that, no matter which policy instrument is used, output gap and inflation respond to identical monetary shocks with a similar speed and movement, albeit with a different degree of effect. [ABSTRACT FROM AUTHOR]

Provides information on the monetary policy of the European Central Bank (ECB). Role of the ECB in the introduction of the actual euro notes and coins; Factors that contributed to the changes in interest rates; Strength of the exchange rate throughout 2002.

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 the early hours of August 1, 1993, weary European Monetary System (EMS) officials reluctantly adopted the deep bands of fluctuations around unchanged central parities. The new bands avoided a complete breakdown, possibly a fatal blow to the wider objective of a single currency. The official communiqué implied that the temporary widening of the margins of fluctuations was a tactical retreat in the face of a year-long series of attacks. Soon afterwards, though, a new, more upbeat view, emerged, presenting the deep bands as the definitive solution to increased financial-market instability. This article looks into the actual behavior of the new EMS as revealed by daily exchange-rate data. The estimates indicate that the new deep bands adopted in 1993 conceal the adoption of narrower bands, which are typically not centered around the official parity. The current system has a number of advantages, which are contrary to the spirit of the old EMS. First, the bands may be moved at the authorities' discretion. Authorities no longer offer one-way bets to speculators. The cost of frequently changing the bands is a loss of credibility and possibly higher volatility in the interest rate or a higher exchange-rate premium. Second, contrasting with the countries, which suspended participation to exchange-rate mechanism of the EMS, the system of deep bands has exerted a stabilizing effect on exchange rates.