0321316762_IM_20 - Chapter 20 Optimum Currency Areas and...

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Chapter 20 Optimum Currency Areas and the European Experience T Chapter Organization How the European Single Currency Evolved What has Driven European Monetary Cooperation The European Monetary System: 1979 to 1998 Germany Monetary Dominance and the Credibility Theory of the EMS The EU 1992 Initiative European Economic and Monetary Union The Euro and Economic Policy in the Euro Zone The Maastricht Convergence Criteria and the Stability and Growth Pact Box: Designing and Naming a New Currency The European System of Central Banks The Revised Exchange Rate Mechanism The Theory of Optimum Currency Areas Economic Integration and the Benefits of a Fixed Exchange Rate Area: The GG Schedule Economic Integration and the Costs of a Fixed Exchange Rate Area: The LL Schedule The Decision to Join a Currency Area: Putting the GG and LL Schedules Together What is an Optimum Currency Area? Case Study: Is Europe an Optimum Currency Area? The Extent of Intra-European Trade Box: How Much Trade Do Currency Unions Create? How Mobile is Europe’s Labor Force? Other Considerations Summing Up The Future of EMU Summary
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120 Krugman/Obstfeld • International Economics: Theory and Policy, Seventh Edition T Chapter Overview The establishment of a common European currency and the debate over its possible benefits and costs was one of the key economic topics of the 1990s. Students should be familiar with the euro, but probably not with its technical aspects or its history. This chapter provides them with the historical and institutional background needed to understand this issue. It also introduces the idea of an optimum currency area and presents an analytical framework for understanding this concept. The discussion in this chapter points out that European monetary integration has been an ongoing process. Fixed exchange rates in Europe were a by-product of the Bretton Woods system. When strains began to appear in the Bretton Woods system, concerns arose about the effects of widely-fluctuating exchange rates between European countries. The 1971 Werner report called for the eventual goal of fixed exchange rates in Europe. Reasons for this included enhancing Europe’s role in the world monetary system and turning the EU into a truly unified market. Also, many Europeans hoped economic unification would encourage political unification and prevent a repeat of Europe’s war torn history. The first attempt at a post-Bretton Woods fixed exchange rate system in Europe was the “Snake.” This effort was limited in its membership. The European Monetary System (E.M.S.), established in 1979, was more successful. The original member countries of the E.M.S. included Germany, France, Italy, Belgium, Denmark, Luxembourg, the Netherlands, and Ireland. In later years, the roll of membership grew to include Spain, Great Britain, and Portugal. The E.M.S. fixed exchange rates around a central parity. Most currencies were allowed to fluctuate above or below their central rate by 2.25 percent although the
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This note was uploaded on 05/18/2010 for the course ECON 203 taught by Professor Kim during the Spring '10 term at Korea University.

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0321316762_IM_20 - Chapter 20 Optimum Currency Areas and...

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