Regional Currency Areas in Financial Globalization
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Regional Currency Areas in Financial Globalization

Edited by Patrick Artus, André Cartapanis and Florence Legros

This book is an up-to-date, authoritative and comprehensive analysis of the key issues and challenges facing regional currency area projects in the context of financial globalization. The authors focus on several central issues that emerged during the experiences of the 1990s and 2000s: exchange rate regimes and optimal currency area theory; exchange rate regimes in emerging countries, international capital markets and regional currency areas; EMU and the euro; exchange rate regimes in Central and Eastern Europe, Asia and Latin America; dollarization and the coordination of macroeconomic policies in the presence of regional currency areas.
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Chapter 10: Exchange Rate Regimes in the Route to EMU

Michel Aglietta, Camille Baulant and Sandra Moatti


Michel Aglietta, Camille Baulant and Sandra Moatti INTRODUCTION: DILEMMAS IN THE ROUTE TO EMU Monetary integration into the euro zone of central European countries, candidates for EC membership, will not be a smooth process. Between 1998 and 2001, most of these countries have moved to more flexible exchange rate regimes. They have done so for good reasons. This chapter shows that preparing for EMU will be a tortuous and lengthy process. A precipitous move to the ERM-2 arrangement would be a cardinal error, which could undermine real convergence. To shed light on this matter the chapter is organized as follows. The first part depicts the changes made by the main Central European countries in their respective monetary policy after the excesses of high inflation had been tamed. It epitomizes how these changes were made as a reaction to tensions triggered by the opening of the capital account and how a degree of flexibility in the exchange rate was combined with domestic monetary management. The second part studies the combination of different exchange rate regimes and monetary policy in a simple macroeconomic model. It shows that their interplay depends on imperfections in the domestic financial system of these countries. Because of the destabilizing effect of capital flows, a managed float cum monetary policy dedicated to stabilizing the foreign currency debt looks capable of compromising better between external and domestic imbalances. The third part deals with the possible tradeoff between nominal and real convergence in the route to EMU....

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