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Fear of Floating and the External Effects of Currency Unions

Authors


  • For helpful comments we wish to thank Thomas Cusack, Rob Franzese, Mark Hallerberg, Philip Lane, Helmut Lüthkepohl, Rick van der Ploeg, Robert Walker, Peter Welzel, and Hannes Winner. Ulrike Krämer provided valuable research assistance at early stages of this project. Previous versions of this article were presented at the London School of Economics, the University of Essex, Trinity College Dublin, the European University Institute Florence, the Ludwig-Maximillians-University of Munich, the Science Centre Berlin, the University of Freiburg, the University of Augsburg, the University of Hamburg, the Max-Planck-Institute in Cologne, and the 2004 annual meeting of the Midwest Political Science Association.

Thomas Plümper is professor of government, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, UK (tpluem@essex.ac.uk). Vera E. Troeger is assistant professor of government, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, UK (vtroeg@essex.ac.uk).

Abstract

The introduction of the Euro has considerably affected the de facto monetary policy autonomy—defined as independence from monetary policy in the key currency areas—in countries outside the European Currency Union (ECU). Using a standard open economy framework, we argue that de facto monetary policy autonomy has significantly declined for countries that dominantly trade with the ECU and slightly increased for countries that dominantly trade with the Dollar zone. The predictions of our model find support in the data. We estimate the influence of the Bundesbank's/ECB's and the Fed's monetary policies on various country groups. The de facto monetary policy autonomy of both non-Euro EU members and EFTA countries declined with the introduction of the Euro. This effect was slightly stronger for the EU member countries than for EFTA countries as our theory predicts. At the same time, the de facto monetary policy autonomy of Australia and New Zealand vis-à-vis the US Dollar has (moderately) increased.

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