The purpose in this letter is first to review briefly the empirical results on the relationship between real interest rates and real exchange rates; this empirical literature provides little support for the hypothesis of Roll that expected real interest rates are equal in general. Our second aim...

The theory of optimal currency areas, due to Mundell and McKinnon, has enjoyed a revival of interest in the wake of European discussions of monetary union. The basic theme of this old literature is that there are potential gains for stabilization policy in an independent exchange rate and money...

A large econometric literature has found that post-war US inflation exhibits very high persistence, approaching that of a random walk process. Given similar evidence for other OECD countries, many macroeconomists have concluded that high inflation persistence is a 'stylized fact'. The objective...

Some years ago I did a fair amount of work on whether Britain should join the euro, in the context of the debate on the 'five tests' set out by HM Treasury. Five years on it is an interesting issue to revisit, particularly in the light of the recent banking crisis. In what follows I discuss the...

A recent paper by Ruge-Murcia (2004) on asymmetric central bank objectives provides a new perspective on the policy roots of inflation in developed economies. More precisely, the paper demonstrates that if the distribution of the supply shocks is normal, then the reduced-form solution for...