The Global Implications of Regional Exchange Rate Regimes

We examine the implications of a regional fixed exchange rate regime for global exchange rate volatility. We find that the concept of the optimum currency area plays a key role. There are significant effects on the volatility of the remaining flexible parities when the countries participating in the regional peg - the quot;insquot; - are not an optimum currency area. Or, but to a smaller extent, when the quot;insquot; and the quot;outsquot; are asymmetric with regard to labor market flexibility and monetary policy conduct. Our analysis also suggests that greater global exchange rate stability would be more likely to be obtained if the U.S. rather than the EU targeted the EUR/USD rate