Booms and Busts in Emu

Uppsala University Economics Working Paper No. 2003-29

35 Pages Posted: 28 Dec 2003

See all articles by Nils Gottfries

Nils Gottfries

Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Date Written: December 2003

Abstract

A floating exchange rate combined with a clear inflation target can be a powerful stabilizer even if there are fluctuations in exchange rates that are unrelated to current fundamentals. Under plausible conditions, most of the stabilisation will occur through the exchange rate, and fundamental shocks will generate considerable medium term exchange rate volatility. The consequences of asymmetric shocks inside EMU are worse than envisaged in early analyses of the EMU project such as Calmfors et al. (1997). Inflation and real interest rate differentials arise which magnify the imbalances and cause boom-bust cycles in the member countries.

Keywords: Optimal currency area, imperfect competition, interest parity, real interest rate.

JEL Classification: E31, E32, E42, F41

Suggested Citation

Gottfries, Nils, Booms and Busts in Emu (December 2003). Uppsala University Economics Working Paper No. 2003-29. Available at SSRN: https://ssrn.com/abstract=481542 or http://dx.doi.org/10.2139/ssrn.481542

Nils Gottfries (Contact Author)

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden
+46 18 471 2304 (Phone)
+46 18 471 1478 (Fax)

HOME PAGE: http://www.nek.uu.se/faculty/gottfries/index.html

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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