In this paper I focus on two specific hazard areas in the transition from Stage Two to Stage Three of European economic and monetary union (EMU), as well as on some key problems of Stage Three that EMU's monetary and fiscal structures appear ill-prepared to handle. The transitional hazards are...

In this paper we connect the events of the last twelve months, "The Panic of 2008" as it has been called, to the demand for international reserves. In previous work, we have shown that international reserve demand can be rationalized by a central bank's desire to backstop the broad money supply...

The paper generalizes the Taylor principle---the proposition that central banks can stabilize the macroeconomy by raising their interest rate instrument more than one-for-one in response to higher inflation---to an environment in which reaction coefficients in the monetary policy rule evolve...

The paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages. Explicit solution of the wage-setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare, expected output, and the expected terms of trade....

This paper surveys recent research in open-economy macroeconomics, using questions raised by European economic and monetary unification to guide the topics discussed. A striking empirical regularity is the tendency for changes in the nominal exchange rate regime systematically to affect the...

Central bank balance sheet expansion is financed by commercial banks. It involves not just a substitution of liquid central bank reserves for other assets held by commercial banks, but also a counterpart alteration in commercial bank liabilities, such as in short-term deposits issued to finance...

When the goals of internal and external macroeconomic equilibrium are in conflict, sterilized intervention in the foreign exchange market may provide an independent policy instrument through which the central bank can resolve its dilemma in the short run. This paper is concerned with the West...

This paper is a highly selective review of our knowledge about the scope for sterilized intervention in foreign exchange markets under alternative exchange-rate regimes. Section I demonstrates the potential importance of simultaneous-equations bias in single-equation econometric studies of the...

This paper presents a long-run model of the open economy in a world of fixed exchange rates and imperfect substitutability between bonds denominated in different currencies. The model explicitly accounts for the wealth flow accompanying current-account imbalance and for the flow of interest...