Exchange-Rate Unions and the Volatility of the Dollar

Exchange-Rate Unions and the Volatility of the Dollar PDF

Author:

Publisher:

Published: 1985

Total Pages:

ISBN-13:

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This study analyzes why formation of an exchange-rate union, such as the newly-established European Monetary System, can be harmful to the interests of some member countries. The framework provided for analyzing behavior in the union is a three-country model which combines an asset market determination of exchange rates with a price sector emphasizing wage indexation behavior and price competitiveness between countries. The three countries consist of two members of the union as well as a nonmember country (the United states), allowing the study to investigate trade and financial relationships within and outside the union. The study examines how each country's exchange rates and prices respond to stochastic disturbances of several types, of which the most important is a capital account disturbance directly affecting one member's financial market (originating, for example, in shifts between U.S. securities and those of one member country). The analysis shows that the effects of the union on each member country depends upon (1) the source of those economic disturbances which give rise to fluctuations in exchange rates, (2) the share of trade between members of the union, (3) the degree of integration between the financial markets of the member countries, and (4) the responsiveness of domestic wages and prices to changes in exchange rates. The exchange-rate union fixes the cross exchange rate between member currencies, thereby preventing disturbances from affecting this key exchange rate. In doing so, however, the union may actually increase the variability of prices in the economy of one member country. The outcome depends critically upon the degree of financial integration between the two member countries in the absence of the union. The importance of another factor, domestic price responsiveness, is brought out clearly by comparing the alternative extremes of no price adjustment and full price adjustment to exchange rate changes. Price behavior interacts in an interesting way with financial int.

Currency Union and Exchange Rate Issues

Currency Union and Exchange Rate Issues PDF

Author: Ronald MacDonald

Publisher: Edward Elgar Publishing

Published: 2010-01-01

Total Pages: 209

ISBN-13: 1849805377

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This book written by leading academics and practitioners in the field brings together cutting edge research on exchange rate regime and monetary union issues. There is a particular focus on the implications for member states of the Gulf Cooperation Council (GCC) which is itself working towards forming a monetary union for the Gulf States. The relatively dramatic movements in the US dollar in the recent past, and also in the early 1990s, have called the practice of pegging to the US dollar into question for a group of countries that predominantly rely on hydrocarbons as their primary export. The book considers the key issues which must be addressed by the GCC in trying to form a monetary union for the Gulf countries and also the rigid pegging of member states currencies to the US dollar. The proposed monetary union raises clear issues in terms of the appropriateness of such a regime for these countries and whether, for example, the necessary institutional mechanisms are in place ahead of the proposed union. Currency Union and Exchange Rate Issues brings together the perspectives of a group of experts who focus on these important issues, and provide analysis of the policy options. Academics, policymakers and postgraduates in international finance will find much to consider and learn from in this informative book.

Currency Unions

Currency Unions PDF

Author: Alberto Alesina

Publisher: Judaic Studies (Paperback)

Published: 2001

Total Pages: 116

ISBN-13:

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What is the optimal number of currencies in the world? Common currencies affect trading costs and, thereby, the amounts of trade, output, and consumption. From the perspective of monetary policy, the adoption of another country's currency trades off the benefits of commitment to price stability against the loss of an independent stabilization policy. The nature of the tradeoff depends on co-movements of disturbances, on distance, trading costs, and on institutional arrangements such as the willingness of anchor countries to accommodate to the interests of clients.

The Dollarization Debate

The Dollarization Debate PDF

Author: Dominick Salvatore

Publisher: Oxford University Press, USA

Published: 2003

Total Pages: 491

ISBN-13: 019515536X

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This book takes a global approach to one of today's most controversial topics in business: Dollarization. With the collapse of the former Soviet Union, and the formation of the Euro in Europe, many countries are debating whether or not a common currency is in their best interest. This intriguing volume brings together the leading participants in the current dollarization debates.

European Monetary Union and Exchange Rate Dynamics

European Monetary Union and Exchange Rate Dynamics PDF

Author: Paul J.J. Welfens

Publisher: Springer Science & Business Media

Published: 2012-12-06

Total Pages: 184

ISBN-13: 3642569137

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The creation of the European Central Bank and the Euro have brought new challenges to EU integration and economic policy. This book looks into issues of monetary and factor market policies. The analysis presents new theoretical and empirical research on the current decline of the Euro. Issues regarding exchange rate policies and international economic relations are also addressed.

Limiting Currency Volatility to Stimulate Goods Market Integration

Limiting Currency Volatility to Stimulate Goods Market Integration PDF

Author: David C. Parsley

Publisher: International Monetary Fund

Published: 2001-12

Total Pages: 38

ISBN-13:

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This paper empirically studies the effect of instrumental and institutional stabilization of the exchange rate on the integration of goods markets. An instrumental stabilization of the exchange rate is accomplished through intervention in the foreign exchange market, or by monetary policies. An institutional stabilization, is an adoption a currency board or a common currency. In contrast to the literature that employs data on the volume of trade, an important novelty of this paper is the use of a 3-dimensional panel of prices of 95 very disaggregated goods (e.g., light bulbs) in 83 cities from around the world from 1990 to 2000. We find that goods market integration is increasing over time and is inversely related to distance, exchange rate variability, and tariff barriers. In addition, the impact of an institutional stabilization of the exchange rate provides a stimulus to goods market integration that goes far beyond an instrumental stabilization. Among the institutional arrangements, long-term currency unions demonstrate greater integration than more recent currency boards. All of them can improve their integration further relative to a U.S. benchmark.

One Money, One Market

One Money, One Market PDF

Author: Andrew Rose

Publisher:

Published: 1999

Total Pages: 62

ISBN-13:

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A gravity model is used to assess the separate effects of exchange rate volatility and currency unions on international trade. The panel data, bilateral observations for five years during 1970-90 covering 186 countries, includes 300+ observations in which both countries use the same currency. I find a large positive effect of a currency union on international trade, and a small negative effect of exchange rate volatility, even after controlling for a host of features, including the endogenous nature of the exchange rate regime. These effects, statistically significant, imply that two countries sharing the same currency trade three times as much as they would with different currencies. Currency unions like the European EMU may thus lead to a large increase in international trade, with all that that entails.

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