The actual mainstream view of academics emphasizes the so-called two corner solution with either completely fixed or independently floating exchange rates. We will argue in this paper that the requirements for fixed rates are very restrictive to be successful. On the other hand, the advantage of...

This paper evaluates the consequences of the integration of international asset markets when goods markets are characterized by price rigidities. Using an open economy general equilibrium model with volatility in the money markets, we show that such an integration is not universally beneficial....

A traditional OCA criterion holds that the more symmetric the shock exposure of countries, the more suited they are for currency union. According to Frankel and Rose (1998, 2002), growing correlation of the ex post income fluctuations of members also can provide endogenous justification for...

A traditional OCA criterion holds that the more symmetric the shock exposure of countries, the more suited they are for currency union. According to Frankel and Rose (1998, 2002), growing correlation of the ex post income fluctuations of members also can provide endogenous justification for...

Omitted from traditional OCA criteria, price effects are important because regional monetary union protects from pricing risks and contributes to greater uniformity and efficiency in price setting. Among member countries it reduces price dispersion in tradables in part by irrevocably fixing the...

This paper discusses whether the integration of international financial markets affects business cycle fluctuations. In the framework of a new open economy macro-model, we show that the link between financial openness and business cycle volatility depends on the nature of the underlying shock....

Regional monetary union offers important income and price-level insurance to its members. The welfare gains available through the completion of financial markets from income and consumption insurance alone are especially large. They are much greater than those available from access to...

The rise and fall of Argentina's currency board illustrates the extent to which the advantages of hard pegs have been overstated. The currency board did provide nominal stability and boosted financial intermediation, at the cost of endogenous financial dollarization, but did not foster fiscal or...

We provide an overview of the recent developments of the literature on the determinants of long-term capital flows, global imbalances, and valuation effects. We present the main stylized facts of the new international financial landscape in which external balance sheets of countries have grown...

Many central banks whose exchange rate regimes are classified as flexible are reluctant to let the exchange rate fluctuate. This phenomenon is known as "fear of floating". We present a simple theory in which fear of floating emerges as an optimal policy outcome. The key feature of the model is...