Working Paper: CEPR ID: DP2768
Authors: Fabrice Collard; Harris Dellas
Abstract: We examine macroeconomic stability and the properties of the international transmission of business cycles under three exchange rate systems: a flexible, a unilateral peg and a single currency. The subjects of study are Germany and France. EMU increases output and decreases inflation variability in Germany but it has the opposite effect in France. It induces a strong negative international transmission of country specific supply shocks and amplifies the role of German supply shocks. These two facts may complicate ECB policy-making.
Keywords: flexible exchange rate; international business cycle transmission; monetary union; Taylor rules; unilateral exchange rate pegging
JEL Codes: E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate systems (F33) | macroeconomic stability (E60) |
| exchange rate systems (F33) | transmission of business cycles (F44) |
| flexible exchange rate regime (F33) | transmission of country-specific supply shocks (F41) |
| fixed exchange rate regime (F33) | transmission of country-specific supply shocks (F41) |
| EMU (F36) | output variability in Germany (C67) |
| EMU (F36) | inflation variability in Germany (E31) |
| EMU (F36) | transmission of country-specific supply shocks in France (F41) |
| EMU (F36) | amplification of German supply shocks in France (N14) |
| flexible rates (F31) | macroeconomic stability (output) in Germany (E66) |
| flexible rates (F31) | macroeconomic stability (inflation) in Germany (E63) |