European Monetary Union
Asymmetries and adjustment

It often argued that the decision whether to move immediately to a monetary union with fixed exchange rates or to adopt the more gradual approach of the Delors Report should depend on the nature of the anticipated shocks to the system. A monetary union can optimally deal with external shocks that affect member countries symmetrically, while policies such as realignment are required to cope with predominantly asymmetric shocks. In particular, monetary union implies the loss of the exchange rate as an adjustment instrument.

In Discussion Paper No. 448, Research Fellow Axel Weber analyses two types of asymmetries in the EMS with reference to their implications for EMU. First, Weber detects `German dominance' in the conduct of monetary policies in the EMS. German short-term monetary policy actions, as reflected by interest rate adjustments, are found to dominate interest rate policy in the non-German EMS member countries, especially at the short end of the maturity range; but the EMS is far from being a `DM-zone'.

Second, Weber considers asymmetries in shocks to a number of macroeconomic variables, and his results indicate that asymmetries in the behaviour of real wages (which is important in the `optimal currency area' literature) and of member countries' current accounts (which may reflect the incompatibility of improved exchange rate stability with the underlying relative development of their economies) may represent potential obstacles to further monetary integration.

EMU and Asymmetries and Adjustment Problems in the EMS: Some Empirical Evidence
Axel A Weber

Discussion Paper No. 448, August 1990 (IM)