This paper explores the implications of a new theory of price determination (due to Leeper, Woodford and Sims) for the maintenance of various exchange rate systems – crawling pegs, fixed pegs, and common currency areas. It shows that deeper monetary integration requires more fiscal discipline,...

While overall inflation has fallen dramatically in countries like Italy and Spain, inflation in the home good sector remains stubbornly higher than inflation in the traded good sector. If nominal exchange rates are fixed, these real appreciations imply an inflation differential with countries...

A new theory of price determination suggests that if primary surpluses are independent of the level of debt, the price level has to ‘jump’ to assure fiscal solvency. In this regime (which we call fiscal dominant), monetary policy has to work through seignorage to control the price level. If,...