Introduction

Abstract

Forming or joining a monetary union requires acceptance of a common currency and a common central bank irrespective of cross-country differences in initial conditions. This is sometimes called the “one-size-fits-all” problem. From the perspective of an individual country, the common monetary policy induces interest rate impulses relative to interest rates obtained under national monetary autonomy, because short term nominal interest rates are equalized across the union. At the same time, national currencies are irrevocably fixed to the common currency at certain conversion rates. Compared to exchange rates that would have obtained without monetary union, there are exchange rate impulses which depend on the procedure for fixing conversion rates ¡ª as shown in this treatise. Both nominal impulses exhibit macroeconomic effects in a monetary union.