This paper studies the optimal choice of exchange rate regimes between two large currency areas. It provides a positive and normative analysis of alternative monetary policy rules in a model with sticky prices, monopolistic competition, and frictions in the processes of capital accumulation and...

The European Monetary System (EMS) is intended to stabilise internal exchange rates. The EMS uses a formula to allocate responsibility among the member nations for counteracting exogenous disturbances of exchange rates. This paper describes the results of a simulation study of the EMS....