DP216 The EMS, The Dollar and the Yen
The paper investigates four challenges to exchange rate stability in the coming years and explores their implications for macroeconomic and exchange rate policy. The first section explores the importance of seigniorage in financing the government budget in Southern European countries. The second issue concerns real interest rates. The third obstacle to exchange rate stability is the continuing, sizeable overvaluation of the dollar. The paper also discusses excess capital mobility and the rationality of exchange markets, and endorses the Tobin proposal for market segmentation.