Exchange Rate Policies for the Transition to Emu

Urmas Sepp and Martti Randveer (eds.), "Alternative Monetary Regimes in Entry to EMU", Bank of Estonia, pp. 95-132, 2002

38 Pages Posted: 6 Apr 2005

See all articles by Peter Bofinger

Peter Bofinger

University of Würzburg - Institute of Economics and Social Sciences

Timo Wollmershaeuser

Ifo Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Abstract

In this paper we formalize the framework for monetary and exchange rate policy presented in Bofinger and Wollmershäuser [2001a]. We develop a simple comparative static model for an open economy that allows us to discuss monetary policy under the exchange rate strategies of independently floating exchange rates, managed floating and absolutely fixed exchange rates. In contrast to the actual mainstream view of academics which emphasizes the so-called "two corner solution" with either absolutely fixed or independently floating exchange rates we favour as an intermediate solution the strategy of managed floating where central banks simultaneously control the interest rate and the exchange rate in a way that guarantees both, the achievement of domestic macroeconomic objectives and an equilibrium on the international financial markets. As an institutional framework for managed floating we examine the appropriateness of the Exchange Rate Mechanism of the current European Monetary System and we propose the necessary reforms.

Keywords: Inflation targeting, Open economy, Managed floating, ERM 2

JEL Classification: E42, F33, F36, F41

Suggested Citation

Bofinger, Peter and Wollmershaeuser, Timo, Exchange Rate Policies for the Transition to Emu. Urmas Sepp and Martti Randveer (eds.), "Alternative Monetary Regimes in Entry to EMU", Bank of Estonia, pp. 95-132, 2002, Available at SSRN: https://ssrn.com/abstract=683763

Peter Bofinger

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
Wuerzburg, 97070
Germany
+49 931 312 944/5 (Phone)
+49 931 312 775 (Fax)

Timo Wollmershaeuser (Contact Author)

Ifo Institute for Economic Research ( email )

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Germany
+49 89 9224 1406 (Phone)
+49 89 9224 1462 (Fax)

HOME PAGE: http://www.ifo.de/link/wollmershaeuser_t.htm

CESifo (Center for Economic Studies and Ifo Institute)

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