Working Paper: CEPR ID: DP298
Authors: Francesco Giavazzi
Abstract: This paper reviews the arguments for and against monetary unification in Europe, taking into account the recent shift in emphasis in discussions of exchange rate regimes. It discusses the merits of irrevocably fixed versus flexible exchange rates in the light of the literature on international strategic interactions, where inefficiencies arise from countries' incentives to run beggar-thy-neighbor policies. The long run level of inflation is viewed as determined by the 'credibility' of the monetary authorities: the choice of the exchange rate regime modifies the constraints faced by monetary authorities and may thus modify the equilibrium inflation rate.
Keywords: fixed and flexible exchange rates; monetary unification; EMS; seigniorage; financial liberalization
JEL Codes: 300; 430
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary unification (F36) | government revenue (H27) |
| inflation (E31) | seigniorage (E42) |
| monetary unification (F36) | destabilization of budgets (H60) |
| fixed exchange rate regime (F33) | fiscal reforms (H39) |
| irrevocably fixed exchange rates (F33) | inflation rates (E31) |