By Francisco Torres, Francesco Giavazzi
This quantity analyzes the ecu Community's transition to fiscal and financial union (EMU) within the mild of the agreements reached at Maastricht final 12 months. It derives from a convention held through the CEPR and the financial institution of Portugal, and comprises between its members a couple of famous educational commentators on ecu integration. the problems addressed within the quantity contain: the connection among a standard foreign money and inflation convergence; the results of economic unification on Europe's more and more built-in monetary markets and financial structures; and EMU's implications for the EC's long term progress.
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Additional resources for Adjustment and Growth in the European Monetary Union
Whether that will, in fact, be possible, depends on the resolution of the present conflicts over the seat of the European Parliament and of some new EC agencies. There is a similar provision in the ESCB Statute on the choice of location for the ECB; the realistic assumption is that this will be the same as for the EMI. Presumably the hardening of the ECU which will occur sometime in the second half of this decade when the common currency takes over from the basket is the main explanation why the interest rate on 10-year ECU bonds is presently approximately 50 basis points lower than the basket formula would imply.
In fact, consumer prices may not be a very good indicator of competitiveness; the prices of traded goods - or unit factor costs - may give a more accurate picture. According to this explanation, the convergence of inflation of tradable goods should be a sufficient condition for membership of a fixed exchange regime such as the European monetary system. In other words, higher rates of inflation associated with movements in the relative price of non-tradables caused by real factors are compatible with a fixed exchange rate regime.
6 Francisco Torres and Francesco Giavazzi 3 Financial market integration and capital taxation Recently many economists have drawn attention to the changing character of the exchange rate mechanism. Governments were, until the summer of 1992, evidently reluctant to seek realignments in circumstances that would earlier have prompted them to do so: the exchange rate mechanism, between 1987 and 1991, became more 'credible' than formerly. In Chapter 9 Jeffrey Frankel, Steven Phillips and Menzie Chinn use both direct survey evidence of exchange rate forecasts and interest rate differentials to test how the credibility of the ERM's target zones has changed over time, and in particular whether the markets have regarded the currency bands as more credible since the last realignment of parities in the 1980s.