The attractiveness of the EMU exchange rate stabilization program

Research output: Contribution to journalArticleScientificpeer-review

Abstract

One of the arguments for a monetary union is that it reduces the variability of exchange rates. This paper demonstrates that the welfare gain that EU countries can expect to gain from the move to a single currency is moderate. The gains from exchange rate stabilization are limited by imports of foreign consumption goods and borrowing by governments. Furthermore, exchange rate stabilization may imply a welfare loss as the removal of non-zero exchange rate expectations
deprives investors of the opportunity to speculate on expected-rate-of-return differentials. Numerical simulations suggest that the welfare gain from exchange rate stabilization for the average EU country is equivalent to a 0.9 percent rate of return on portfolio wealth.
Original languageEnglish
Pages (from-to)309-329
JournalEmpirica: Journal of applied economics and economic policy
Volume25
Issue number3
DOIs
Publication statusPublished - 1997
Externally publishedYes

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