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The European Commission's report, One Market, One Money, argued for a
single European currency because it would eliminate transactions costs
(which it estimated as 0.4% of Community GDP) and might also bring other
benefits. In Discussion Paper No. 656, Research Fellows Patrick
Minford and Andrew Hughes Hallett, with Anupam Rastogi,
adapt the Keynesian literature on `optimal currency areas' to assess the
costs of macroeconomic instability arising in a European monetary union
with low labour mobility, a negligible fiscal offset to national shocks,
and short-run nominal wage and price rigidity. They argue that the loss
of national exchange rates as a stabilizing mechanism will be damaging,
and they undertake simulations on the Liverpool world model which
confirm that floating outperforms EMU for all member countries, under
both fixed money supply rules and strategically responsive monetary
policy. Indeed, even if the rest of the Community proceeds with EMU, the
UK would do better to remain outside, and their simulations on the more
refined Liverpool model of the UK reinforce the latter conclusion. |
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