Vicious and Virtuous Circles and the Optica Proposal: A Two-Country Analysis

  • Giorgio Basevi
  • Paul De Grauwe

Abstract

In a recent article we have tried to present the theory on which a proposal for managing exchange rates among countries of the European Community—the so-called OPTICA proposal—is based.1 Important limitations of our study resulted from the fact that the analysis was conducted in a one-country model and it was not explicitly made dynamic. Thus, at least two weak spots were left in the paper. First, we could only suggest the hypothesis, but not analyse it, that vicious and virtuous circles could reinforce or dampen each other when two countries were confronted. Secondly, we were—wrongly, as we shall show in this paper—induced to ‘prove’ that the OPTICA intervention guidelines could impede real adjustment when a country needed to let its terms of trade fall (its ‘real exchange rate’ rise). We were, therefore, admitting that the OPTICA proposal might be open, on this side, to criticism.2

Keywords

Europe Income Defend Hedging 

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References

  1. B. Balassa, ‘European monetary arrangements: problem areas and policy options’, European Economic Review, vol. 9, no. 3, August 1977.Google Scholar
  2. G. Basevi and P. De Grauwe, ‘Vicious and virtuous circles: a theoretical analysis and a policy proposal for managing exchange rates’, European Economic Review, vol. 10, 1978 (forthcoming).Google Scholar
  3. Commission of the European Communities, Optica Report 1976; Inflation and Exchange Rates—Evidence and Policy Guidelines for the European Community, Brussels, February 10, 1977.Google Scholar
  4. A. Steinherr, P. De Grauwe and G. Basevi, ‘The dynamics of intervention rules in foreign exchange markets’, paper presented at the Conference on The Economics of Flexible Exchange Rates, Vienna, March 29–31, 1978.Google Scholar
  5. R. Vaubel, ‘The next steps in European Monetary Integration: OPTICA 1975 and 1976’, paper presented for the Conference on US-European Monetary Relations, sponsored by the American Enterprise Institute and Georgetown University, March 17–18, 1977, Washington, DC.Google Scholar

Copyright information

© Michele Fratianni and Theo Peeters 1978

Authors and Affiliations

  • Giorgio Basevi
  • Paul De Grauwe

There are no affiliations available

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