Sheet Anchors, Fixed Price Anchors and Price Stability in a Monetary Union

Abstract

Economic and Monetary Union (EMU) represents a substantial change in the way that economic policy will be conducted in Europe. This chapter asks, what can standard economic models say about the costs and benefits of the EMU proposal? There is surprisingly little literature which analyses those costs and benefits formally, although there have been many accounts which give a general description of what is intended to happen. Such descriptions lack the analytic foundations which can demonstrate that those outcomes can in fact be expected and explain what the side-effects may be. Nor do they allow more than impressionistic estimates of the net benefits over costs.

We are grateful to Strathclyde University for financial support. In writing this chapter we have benefited from discussions with Jacques Melitz, from comments by Karl-Otto Pöhl, Richard Portes, Alberto Giovannini and Heinz Handler. We would also like to thank Warwick McKibbin for permission to use his algorithm DYNGAME in computing the adjustment scenarios described in Section 4. None of these people should be held responsible for the contents of the chapter.