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This paper uses a three-region framework to examine the effects of European currency unification on EMU and US inflation rates. It considers ways in which increased participation in the EMU might influence inflation choices in Europe and the United States. It also considers how alternative monetary policies and parameter values might influence the extent of participation in the EMU. [ABSTRACT FROM AUTHOR]

What is the optimal institutional structure for a federal central bank? The framework developed in this paper is used to analyze under what conditions an individual region will prefer a monetary union to be organized according to regional or common influences and how a combination of both can be rationalized. The implications of an enlargement of a monetary union for changes in its institutional setup are also derived. [ABSTRACT FROM AUTHOR]

In past research on the long-run behaviour of exchange rates the possibility of cointegration among spot rates has been rejected. This rejection is surprising as some exchange rates are bound by official agreements to comove over time. The European Monetary System (EMS) is an example of such an officially coordinating system. In this paper we extend past research by focusing on only EMS rates and use potentially more powerful cointegration tests to show that EMS rates are cointegrated. [ABSTRACT FROM AUTHOR]

In this paper, we empirically investigate the link between exchange rate accommodation and inflation persistence in Europe. We introduce the lagged level of the real exchange rate as an appropriate indicator of exchange rate accommodation. We correspondingly estimate a non-linear autoregressive inflation equation for ten European countries (excluding Germany) for the period 1974:1–1998:2. In the estimation procedure we allow for the presence of an unknown number of shifts in the mean of inflation. Overall, our results provide modest support for the existence of the theoretically hypothesized link between exchange rate accommodation and inflation persistence. [ABSTRACT FROM AUTHOR]

One of the many challenges that Kosovo faced after the conflict of 1999 was the selection of a monetary structure. At the time when the United Nations undertook the administration of Kosovo (UNMIK), adoption of the monetary structure based on the utilization of the German Mark appeared as a natural solution. Utilization of a sustainable currency was important in maintaining macroeconomic stability and played a key role in the reestablishment of people's trust in the financial sector. There was an immense urgency for assuring cash currency and the abolition of the Yugoslav Dinar as a means of transaction. At the beginning of 2002 when the replacement of the inherited currency in Euro was carried out in the Eurozone countries, it was also necessary to replace the German Mark in Kosovo. In accordance with UNMIK Regulation No. 1999/4, EURO ("EUR") was adopted as an official currency in Kosovo as of January 1st 2002. EURO replaced the German Mark ("DEM") which was the measurement and reporting currency in the territory of Kosovo. The objective of this paper is to present the costs and benefits brought to the Kosovo economy by the utilization of Euro as its main currency in circulation, and to what extent are the costs acceptable compared to the advantages that were brought by the introduction of Euro in the Kosovo economy. [ABSTRACT FROM AUTHOR]

To what extent is the Euro Area common business cycle affected by the inclusion of the UK into this group? To answer this question, a semi-structural model estimated by the Kalman filter, which is robust to outliers and structural breaks, is used. We look at the correlations between business cycles taking potential phase shifts into account. On the one hand, a finding - coherent with existing literature - is that adding the UK to the euro group lowers correlations within the group. On the other hand, the UK cycle is increasingly linked to the Euro Area business cycle and has statistical properties that do not differ substantially from the Euro Area cycles. [ABSTRACT FROM AUTHOR]

The last two decades have seen far-reaching changes in the structure of the international monetary system. Europe moved from the European Monetary System to the euro. China adopted a dollar peg and then moved to a basket, band and crawl in 2005. Emerging markets passed through a series of crises, leading some to adopt regimes of greater exchange rate flexibility and others to rethink the pace of capital account liberalization. Interpreting these developments is no easy task: some observers conclude that recent trends are confirmation of the "bipolar view" that intermediate exchange rate arrangements are disappearing, while members of the "fear of floating school" conclude precisely the opposite. We show that the two views can be reconciled if one distinguishes countries by their stage of economic and financial development. Among the advanced countries, intermediate regimes have essentially disappeared; this supports the bipolar view for the group of countries for which it was first developed. Within this subgroup, the dominant movement has been toward hard pegs, reflecting monetary unification in Europe. While emerging markets have also seen a decline in the prevalence of intermediate arrangements, these regimes still account for more than a third of the relevant subsample. Here the majority of the evacuees have moved to floats rather than fixes, reflecting the absence of EMU-like arrangements in other parts of the world. Among developing countries, the prevalence of intermediate regimes has again declined, but less dramatically. Where these regimes accounted for two-thirds of the developing country subsample in 1990, they account for a bit more than half of that subsample today. As with emerging markets, the majority of those abandoning the middle have moved to floats rather than hard pegs. The gradual nature of these trends does not suggest that intermediate regimes will disappear outside the advanced countries anytime soon. [ABSTRACT FROM AUTHOR]

We compare the accuracy of vector autoregressive (VAR), restricted vector autoregressive (RVAR), Bayesian vector autoregressive (BVAR), vector error correction (VEC) and Bayesian error correction (BVEC) models in forecasting the exchange rates of five Central and Eastern European currencies (Czech Koruna, Hungarian Forint, Slovak Koruna, Slovenian Tolar and Polish Zloty) against the US Dollar and the Euro. Although these models tend to outperform the random walk model for long-term predictions (6 months ahead and beyond), even the best models in terms of average prediction error fail to reject the test of equality of forecasting accuracy against the random walk model in short-term predictions. Copyright © 2005 John Wiley & Sons, Ltd. [ABSTRACT FROM AUTHOR]

I interpret the European Central Bank's two-pillar strategy by proposing an empirical model for inflation that distinguishes between the short- and long-run components of inflation. The latter component depends on an exponentially weighted moving average of past monetary growth and the former on the output gap. Estimates for the 1971–2003 period suggest that money can be combined with other indicators to form the‘broadly based assessment of the outlook for future price developments’ that constitutes the ECB's second pillar. However, the analysis does not suggest that money should be treated differently from other indicators. While money is a useful policy indicator, all relevant indicators should be assessed in an integrated manner, and a separate pillar focused on monetary aggregates does not appear necessary.— Stefan Gerlach [ABSTRACT FROM AUTHOR]

The purpose of the present paper is to examine whether this asymmetric effect is a European phenomenon as well. Annual data from the 1953-90 period are used to identify money-supply shocks and their effects on output for a panel of 18 European countries. All different. [ABSTRACT FROM AUTHOR]

The article focuses on the emergence of the euro as an international currency. The international status of the euro will have substantial implications for the international monetary system, the composition of portfolios, exchange rates and monetary policies. Economic efficiency and welfare are also at stake. The rapidly growing literature on the potential international role of the euro typically fails to specify a clear analytical framework, resorting mostly to comparing the sizes of economic areas and financial markets, and making guesses about possible changes in the use of currencies for both trade invoicing and asset denomination. The key determinant of the extent and speed of internationalization of the euro will be transaction costs in foreign exchange and securities markets. Policy-makers and academic writers have long regarded currency hegemony as a source of political as well as economic benefits. The economic advantages from currency hegemony include a comparative advantage for markets and institutions of the issuing country, the advantage for trade of having other countries peg their exchange rates to one's own, and the ability to finance balance of payments deficits with liabilities denominated in the international money, which other countries will accept without effective limit.

On the aftermath of the global credit crunch was made clear that the Euro countries debt crisis shows that the EMU is far from being an Optimal Currency Area (OCA) under its current form. The countries accepted bailouts from their counterparts and international organizations in order to prevent the Eurozone collapse spreading the crisis further. Can the breakup to multiple areas help as Tootel (1990) suggested? Three possible sets of OCA scenarios are analyzed along with the demolition scenario. The breakup of the Eurozone to two currencies consisting possible OCAs along with a second one adding all the EU members and a third one applying in small regions. The scenarios are analyzed by using eleven equally weighted optimum area criteria to make Eurozone a single or a set of sustainable OCAs. These type and extension scenarios are presented for the first time for EU countries finding possible sets of independent country groups. The results show that the asymmetries lead to the crisis persist in a possible two or more "euros" area and this scenario cost is higher than union dissolution's. Europe cannot become in its current form a set of OCAs under any circumstances. [ABSTRACT FROM AUTHOR]

The monetary policy framework of the Eurosystem has received considerable attention in recent years: there is a well-established and rich literature on the price stability objective, as well as the two-pillar strategy of the ECB. This is less the case for the regular monetary policy preparations and the decision-making process. This article provides an insider's roadmap to the procedures to prepare monetary policy decisions by the Governing Council of the ECB. The architecture of the Eurosystem permits the processing and analysis of a vast amount of national and aggregate economic, financial and monetary data and assists the Governing Council in taking monetary policy decisions – and this each month. Our aim is to describe the role of a variety of committees and sub-committees that prepare and support the monetary policy decision-making process. A federal organization is at the heart of this process. At the top of the pyramid of information there is a two-tiered committee structure with the Executive Board taking the lead in bringing together most of the economic, financial and monetary analyses, and the Governing Council utilizing that information, for its monthly economic and monetary analyses. [ABSTRACT FROM AUTHOR]

AbstractThe monetary system of late medieval and early modern Europe has been commonly described as irrational, in the light of later commodity money standards. In particular, the alterations in the legal value and\or in the metal content of most coins throughout this period have been regarded as a source of disorder and as a product of ignorance and abuse. This article suggests that the whole system, and its apparently awkward articulations, may have been deliberately designed to ensure complementarity between domestic and foreign trade. From this perspective, monetary alterations appear as the levers of a peculiar form of monetary policy, with an extra degree of freedom compared to more modern instruments, and equally open to being managed or mismanaged. [ABSTRACT FROM AUTHOR]

The article discusses the conduct of monetary policy of the ECB during its first five years. The authors estimate different versions of the forward-looking policy rule proposed by Clarida et al. (1998, 2000). The results suggest that the ECB applied indeed a Taylor-type rule to its monetary policy. The implied inflation targets that are extracted from the regressions are close to the range of the target that the ECB announced. [ABSTRACT FROM AUTHOR]

In this article, the author considers how Europe's economic and monetary union (EMU) will evolve in the next five to ten years. He concentrates on what is likely to be the most important change in that period, namely the increased number and heterogeneity of participating states. He focuses on the implications of EMU enlargement for the structure, organization, and operation of EMU.

There are no clear precedents for European monetary integration. It would therefore be unwise to rely too closely on evidence drawn from other monetary systems for an indication of where, when and how problems might arise under the new monetary regime. This article comprises four sections. The first deals with issues of economic convergence and the problems associated with viewing the euro zone countries as an optimum currency area. The second moves on to political questions about the accountability of the European Central Bank (ECB) and its credibility in operating a single monetary policy which targets price stability. In the third section, I consider arguments concerning the implications of the relationship between labour mobility and material interest for the workings of a single monetary policy across the euro zone. In the fourth section, I raise broader questions about cultural divergence in economic behaviour within the euro zone. [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.

Discusses the implication of the achievement of economic and monetary union (EMU) in Europe to integration of its currencies and monetary policy. Difference between monetary and fiscal policies; Status of EMU in the European Union.

We analyse the disinflationary experience between 1979-93 for two traditionally inflationary countries of the European Monetary System: France and Italy. For each country, a vector autoregressive model is estimated. Shocks in the model combine domestic and foreign sources. The latter capture the world oil price shocks as well as nominal and real shocks originating in Germany. Under investigation is the hypothesis that shocks originating in Germany have a spillover disinflationary effect in France and Italy. The empirical evidence provides support to the validity of this hypothesis. Furthermore, German shocks account for an important share of the total price variance in France and Italy. These results indicate that the interaction between countries of the European Monetary System has contributed to the success of the disinflationary experiences of the 1980s. The evidence sheds, therefore, some light on potential benefits that may be further realized as countries of the European Monetary System move towards their objective of achieving a single currency under a united monetary system. [ABSTRACT FROM AUTHOR]

When the European Central Bank (ECB) began operations in January 1999, there was a widespread expectation that its monetary policy would be firm and that its currency, the euro, would be strong. That expectation is now in some doubt; interest rates have been cut faster than expected and the euro depreciated by about 10 percent relative to the dollar in its first three months of its existence. Although there are good arguments for monetary expansion in Europe under present circumstances, there are also reasons to believe that monetary policy in Europe may remain more expansionary than has been expected, at least in the short to medium term. A single monetary policy can be expected to work well for the members of the European Monetary Union only as long as these countries have similar rates of inflation and unemployment and therefore need approximately the same monetary conditions. If, however, business-cycle conditions differ widely among the members, a one-size-fits-all monetary policy will not succeed or at least will be quite painful for some countries.

Employers' associations, and their influence on the economic transformation in Eastern Europe, have been largely ignored. In spring 1994, the Hungarian Parliament passed a law on Chambers which will render three new Chambers the supreme regulating source for all entrepreneurs' licensing, training and economic actions; membership will be compulsory. Drafters of the law claim the Austrian/German system as a model, but it is more reminiscent of the socialist structure of authoritarian/state corporatism. What prompted this development in a society with long exposure to market forces? As old normative patterns disintegrate, associations motivated by financial survival compete with the state for the power to dictate new norms. Co-evolutionary theory demonstrates the complex interaction of actors at the macro, organizational and micro levels of this competition and how it is translated into policy. [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]