Leadership and Cooperation in the European Monetary System: A Simulation Approach
To assess the importance of economic interdependence and the potential
gains from policy coordination in the European area, this paper analyzes the
international transmission of policies and disturbances in a rational
expectation dynamic general equilibrium simulation model of the work economy,
and applies the analysis to the study of the European Monetary System.
International spillover effects and potential gains from coordination appear to
be small under the assumption of flexible exchange rates in the European area.
The implications of a fixed rate EMS with German leadership are compared with
those of a cooperative fixed exchange rate regime. Finally, capital controls
under fixed rates fails to insure policy autonomy and insulation from external
disturbances for the countries restricting the capital movements.
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