In contrast to the notion that the exchange-rate regime is non-neutral, there is little evidence that EMU has systematically changed the European business cycle. In fact, we find the volatility of macroeconomic variables largely unchanged before and after the introduction of the Euro. Exceptions...

Real-world central banks have a strong aversion to policy reversals. Nevertheless, theoretical models of monetary policy within the dynamic general equilibrium framework normally ignore the irreversibility of interest rate control. In this paper, we develop a formal model that incorporates a...

This paper uses the simple geometry of the classic, open-economy trilemma to introduce a new gauge of the stability of international macroeconomic arrangements. The new stability gauge reflects the simultaneity of a country's choices of exchange rate flexibility, financial openness, and monetary...

The high correlation between national saving and investment rates in advanced economies—the Feldstein–Horioka puzzle—has been referred to as the “mother of all puzzles.” Perhaps more puzzling is that for emerging economies saving–investment correlations tend to be significantly...

This paper evaluates the role of trade and financial linkages in the decision to enter a monetary union. We estimate a two-country DSGE model for the U.K. economy and the euro area with financial intermediaries as in Gertler and Karadi (2011). We use the model to compute the welfare trade-offs...

We study how US credit supply shocks are transmitted to other economies. We use the recently developed GVAR approach to model financial variables jointly with macroeconomic variables in 33 countries for the period 1983–2009. We experiment with inter-country links based on bilateral trade,...

This paper provides a new perspective on the relationship between countries׳ international reserve holdings and financial crises: while the “local” view holds that reserves may prevent domestic crises, it overlooks that the accumulation of reserves relaxes the financing constraint of the...

Empirical evidence suggests that real exchange rates (RER) behave differently in developed and developing countries. We develop an overlapping generations two-sector exogenous growth model in which RER determination may depend on the country's capacity to borrow from international capital...

In an influential paper Engel (1999) argues that essentially all the fluctuations in the real exchange rate can be attributed to fluctuations in the relative price of traded goods, and that only a small part of the fluctuations can be attributed to changes in the relative price of non-tradables....

In this paper we show that price equalization does not imply zero barriers to trade. There are many barrier combinations that deliver price equalization, but each combination implies a different volume of trade. We demonstrate this first theoretically in a simple two-country model and then...