DP2768 Exchange Rate Systems and Macroeconomic Stability

Author(s):	Fabrice Collard, Harris Dellas
Publication Date:	April 2001
Keyword(s):	Flexible Exchange Rate, International Business Cycle Transmission, Monetary Union, Taylor Rules, Unilateral Exchange Rate Pegging
JEL(s):	E32
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=2768

We examine macroeconomic stability and the properties of the international transmission of business cycles under three exchange rate systems: a flexible, a unilateral peg and a single currency. The subjects of study are Germany and France. EMU increases output and decreases inflation variability in Germany but it has the opposite effect in France. It induces a strong negative international transmission of country specific supply shocks and amplifies the role of German supply shocks. These two facts may complicate ECB policy-making.