biz cycle summary open economy
In an open economy with credibly fixed exchange rates and perfect capital mobility monetary
policy is impotent in the sense that the domestic interest rate has to follow the foreign interest
rate as a consequence of the condition for uncovered interest parity. Despite the loss of
monetary autonomy a country may nevertheless choose a fixed exchange rate regime to
reduce the uncertainty associated with exchange rate fluctuations. By pegging the domestic
currency to the currency of a country with a history of low inflation, domestic policy makers
may also succeed in bringing down the expected and actual domestic rate of inflation.
2. If exchange rates are credibly fixed, private agents are likely to realize that the domestic infla·
tion rate cannot systematically deviate from the foreign inflation rate for an extended period of
time. Our AS·AD model for the open economy with fixed exchange rates therefore assumes
that the expected domestic inflation rate is tied to the foreign inflation rate. On this assump·
tion the economy's short-run aggregate supply curve will not shift during the adjustment to
long-run macroeconomic equilibrium. Instead adjustment will take place through shifts in the
aggregate demand curve as the international competitiveness of domestic producers
changes over time whenever the domestic inflation rate deviates from the foreign inflation
rate.
3. A temporary fiscal expansion will generate a boom-bust cycle: At first output expands, but
when the fiscal stimulus disappears the economy falls into a recession because of the loss of
international competitiveness incurred during the previous expansion. The economy then
gradually recovers from the recession as international competitiveness is gradually restored
through a low domestic rate of inflation.
4. A systematic countercyclical fiscal policy will reduce the short-run output fluctuations
generated by exogenous shocks to aggregate demand and supply, but it will also reduce the
economy's speed of adjustment towards long-run equilibrium, since a countercyclical fiscal
policy rule implies an automatic tightening of fiscal policy as the economy recovers from a
recession, and an automatic relaxation of fiscal policy when the economy starts to move back
towards a normal activity level following a boom.
5. An unanticipated devaluation will temporarily stimulate domestic output, but in the long run
the economy settles in an equilibrium where all real variables are unaffected by the devaluation.
Hence a devaluation is neutral in the long run because the initial gain in international
competitiveness is gradually lost again due to the higher domestic inflation rate following the
devaluation. However, in a domestic recession, an unanticipated devaluation may speed up
the adjustment to a normal activity level.
6. In practice, a devaluation is often (partly) anticipated.ln that case it will generate a bust-boom
cycle: before the devaluation the economy will be pushed into recession because the fear of
a future devaluation generates a capital outflow which drives up the domestic real interest
rate. When the devaluation occurs, output expands, even though domestic inflation also rises,
in part because of a higher expected rate of inflation. Over time, the higher inflation rate
gradually eliminates the gain in domestic competitiveness stemming from the devaluation, and
the economy returns to the original long-run equilibrium.
7. A fixed exchange rate regime is vulnerable to speculative attacks in a world of high capital
mobility. The vulnerability stems from the fact that currency speculation is virtually without any
risk under such a regime. The historical experience shows that a speculative attack can occur
very suddenly once financial markets start to doubt a government's commitment to defend its
fixed exchange rate.
A crucial characteristic of a flexible exchange rate regime is that it enables the domestic
central bank to pursue an independent monetary policy even if capital mobility is perfect.
2. Under a floating exchange rate regime the nominal exchange rate cannot serve as a nominal
anchor for inflation expectations. To provide an alternative nominal anchor, many countries
with flexible exchange rates have adopted a monetary policy regime of inflation targeting
where the central bank seeks to keep inflation within a narrow band around some target rate
which is typically set to 2-2.5 per cent. Under strict inflation targeting the central bank's
interest rate reacts only to deviations of inflation from the target, whereas flexible inflation
targeting implies that the central bank also reacts to the evolution of output and employment.
The fact that inflation targeting countries in the OECD have chosen roughly the same inflation
target suggests that these countries try to avoid a systematic depreciation or appreciation of
their nominal exchange rates over the longer run.
3. Most inflation targeting countries have delegated monetary policy to an independent central
bank to strengthen the credibility of the inflation target. When the target is credible, it will
serve as an anchor for domestic inflation expectations. The model in this chapter assumes
that agents have weakly rational expectations in the sense that the expected inflation rate
equals the central bank's inflation target. Given that countries choose (roughly) the same
inflation target, this means that the expected domestic inflation rate is (roughly) equal to the
foreign inflation rate.
4. Under flexible exchange rates and perfect capital mobility the difference between the
domestic and the foreign nominal interest rate is given by the expected rate of change in the
nominal exchange rate. According to the hypothesis of regressive exchange rate expectations,
the exchange rate is expected to rise if it is currently below its perceived normal level,
and vice versa. The perceived normal exchange rate is likely to depend on the actual
exchange rates observed in the past. The model in this chapter makes the simplifying assumption
that the perceived normal exchange rate equals last period's actual exchange rate. From
this assumption plus the assumption of uncovered interest rate parity it follows that a positive
differential between the domestic and the foreign interest rate will cause an appreciation of
the domestic currency, whereas a negative interest rate differential will generate a depreciation.
The empirical evidence lends some support to this hypothesis.
5. Under 'clean' floating the central bank does not intervene in the foreign exchange market.
Under 'dirty' floating the central bank intervenes with the purpose of reducing fluctuations in
the exchange rate. In the case of 'sterilized' interventions the central bank buys or sells foreign
currency without changing the interest rate. To have a lasting impact on the exchange rate,
interventions have to be 'unsterilized', involving a change in the interest rate which supports
the movement in the exchange rate that the central bank is trying to achieve. When the central
bank systematically raises (lowers) the interest rate in response to a depreciation (appreciation)
of the domestic currency, it is said to follow a policy of 'leaning against the wind'.
6. In a flexible exchange rate regime monetary policy affects aggregate demand both through
the interest rate channel and through the exchange rate channel. The interest rate channel is the direct impact of a change in the interest rate on investment and consumption demand.
The exchange rate channel is the impact through the foreign exchange market: when the
interest rate is lowered, there is a tendency for the exchange rate to depreciate so that net
exports increase.
7. Under flexible exchange rates a fall in the domestic rate of inflation boosts aggregate demand
through three effects. First, there is a direct positive effect on net exports as domestic competitiveness
improves. Second, a lower rate of inflation induces an inflation-targeting central
bank to reduce the interest rate, thereby stimulating investment and consumption. Third, the
lower interest rate causes a depreciation which gives a further stimulus to net exports. The
latter two effects are absent under fixed exchange rates. Hence the aggregate demand curve
is flatter under flexible than under fixed exchange rates.
8. The AS-AD model for the open economy has a similar structure under fixed and under flexible
exchange rates, but the quantitative properties of the economy will differ under the two
regimes. A priori one cannot say whether convergence on long-run equilibrium will be faster
under one or the other regime.
9. UnciP.r fiP.xihiP. P.Xc:h;mgP. r~tP.S with stric:t infl<'ltion t~rgP.ting, surrly shoc:ks will C:<'lUSP. l~rgP.r
short-run fluctuations in output but smaller fluctuations in inflation than under fixed exchange
rates. Our AS-AD model also predicts that demand shocks ( ncluding fiscal policy shocks)
will generate smaller fluctuations in output as well as inflation under flexible than under fixed
exchange rates, because a floating exchange rate allows the central bank to counteract
demand shocks through its interest rate policy.
10. When domestic and foreign assets have different risk characteristics and financial investors
are risk averse, fluctuations in required risk premia can cause fluctuations in nominal
exchange rates under floating exchange rates. Empirical evidence suggests that exchange
rates tend to move in response to shocks other than those that drive output fluctuations and
that a large part of exchange rate variability originates from disturbances to the foreign
exchange market itself. This does not support the idea that the exchange rate plays an
important role as a shock absorber.
11. Floating exchange rates tend to undergo large swings in the medium term and often seem to
'overshoot' their long run equilibrium values. Such apparently irrational behaviour may be
quite compatible with rationality. For example, financial investors may correctly anticipate that
a permanent positive demand shock requires a long-term appreciation of the exchange rate.
If the central bank raises the domestic interest rate above the foreign interest rate in response
to the shock, the exchange rate will then have to appreciate even more in the short run than
in the long run to generate market expectations of a future depreciation so that domestic
assets are no more attractive than foreign assets.
1. This chapter discussed the economic factors which are relevant for a country's choice of
exchange rate regime. The various exchange rate regimes found in the world can be cate·
gorized into hard pegs, intermediate regimes, and floating. Under a hard peg the exchange
rate is fully fixed, and the national currency may even have been abandoned as in the case of
membership of a monetary union. Under floating the exchange rate is market-determined,
although the central bank may sometimes intervene in the foreign exchange market to
moderate exchange rate fluctuations. The intermediate exchange rate regimes fall between
the hard pegs and the floating regimes by allowing some exchange rate flexibility within a
(possibly shifting) band around the parity. In recent years there has been a worldwide
tendency for countries to move away from intermediate regimes towards a hard peg or
towards floating exchange rates.
2. Macroeconomic policy choices are subject to the macroeconomic trilemma. The trilemma
arises because a macroeconomic policy regime can include at most two out of the following
three policy goals: (i) free cross-border capital flows, (ii) a fixed exchange rate, and (iii) an
independent monetary policy. Under the classical gold standard before the First World War
most countries chose to sacrifice monetary autonomy. Under the Bretton Woods system of
fixed exchange rates between 1945 and 1971 most countries maintained restrictions on
international capital flows, but since the early 1970s the largest economies have abandoned
fixed exchange rates while allowing capital mobility and pursuing independent monetary
policies. More recently the majority of EU member states have adopted a common monetary
policy and a common currency as a means of ensuring irrevocably fixed exchange rates in a
common market with free capital mobility.
3. There is currently a widespread consensus that the ultimate goal of monetary policy should be
to maintain a low and stable rate of inflation. A country may adopt a fixed exchange rate as an
intermediate target for monetary policy with the purpose of achieving the ultimate goal of low
and stable inflation. However, under fixed exchange rates stable inflation requires not only a
stable inflation rate in the foreign anchor currency country; it also requires stability of the real
exchange rate. This may be hard to achieve if the domestic economy is often exposed to
asymmetric demand and supply shocks.
4. As an alternative to a fixed exchange rate, a country may adopt a flexible exchange rate with
an inflation target to serve as a nominal anchor. Under inflation targeting the central bank's
inflation forecast effectively becomes an intermediate target for monetary policy, since the
central bank can only affect inflation with a time lag of 1 !- 2 years. If the inflation forecast
exceeds (falls short of) the target inflation rate when the interest rate is held constant, the
interest rate must be raised (lowered) until the inflation forecast corresponds to the target.
5. Proponents of flexible exehange rates with inflation targeting argue that this policy regime will
make the deviations of actual inflation from the target rate of inflation as small as existing
economic knowledge permits. They also point out that a fi:<ed exchange rate regime is vu lnerable
to speculative currency attacks. Proponents of fixed exchange rates argue that a floating
rate may be an independent source of shocks and that a stable exchange rate should be
seen as a goal in itself, since exchange rate uncertainty may hamper international trade and
investment.
6. The theory of optimum currency areas sees the choice of exchange rate regime as a trade-off
between the microeconomic benefits and the macroeconomic costs of a fixed exchange rate.
One microeconomic benefit is that a credibly fixed exchange rate reduces the riskiness of
foreign trade and investment. Further benefits are gained if exchange rate stability is achieved
by entering a currency union where the adoption of a common currency reduces international
transactions costs, improves market transparency and increases the liquidity of financial
markets. The macroeconomic costs arise from the fact that a fixed exchange rate/common
currency excludes the possibility of an independent national monetary policy to stabilize the
domestic economy.
7. The microeconomic benefits of a fixed exchange rate/ common currency increase with the
degree of international economic integration whereas the macroeconomic costs decrease
with economic integration. When integration proceeds beyond a certain point, it therefore
becomes optimal to switch from a flexible exchange rate to a fixed rate/ common currency. It
has also been argued that even if joining a currency union is not optimal ex ante, it may
become optimal ex post because the adoption of a common currency will in itself promote
economic integration.
8. Optimum currency area (OCA) theory suggests that the macroeconomic costs of giving up
exchange rate flexibility within a group of trading partners will be relatively small if there is a
low frequency of asymmetric shocks, a high degree of labour mobility across countries, and
an international transfer mechanism securing a transfer of resources from countries hit by
positive shocks to those hit by negative shocks. OCA theory also implies that the microeconomic
benefits of a fixed exchange rate/common currency will be greater the greater the
volume of trade and investment across borders. The evidence indicates that those EU countries
which have so far chosen to opt out of the Economic and Monetary Union do indeed tend
to be more exposed to asymmetric shocks and to trade less with their EU partners than those
countries which have already joined the EMU.
policy is impotent in the sense that the domestic interest rate has to follow the foreign interest
rate as a consequence of the condition for uncovered interest parity. Despite the loss of
monetary autonomy a country may nevertheless choose a fixed exchange rate regime to
reduce the uncertainty associated with exchange rate fluctuations. By pegging the domestic
currency to the currency of a country with a history of low inflation, domestic policy makers
may also succeed in bringing down the expected and actual domestic rate of inflation.
2. If exchange rates are credibly fixed, private agents are likely to realize that the domestic infla·
tion rate cannot systematically deviate from the foreign inflation rate for an extended period of
time. Our AS·AD model for the open economy with fixed exchange rates therefore assumes
that the expected domestic inflation rate is tied to the foreign inflation rate. On this assump·
tion the economy's short-run aggregate supply curve will not shift during the adjustment to
long-run macroeconomic equilibrium. Instead adjustment will take place through shifts in the
aggregate demand curve as the international competitiveness of domestic producers
changes over time whenever the domestic inflation rate deviates from the foreign inflation
rate.
3. A temporary fiscal expansion will generate a boom-bust cycle: At first output expands, but
when the fiscal stimulus disappears the economy falls into a recession because of the loss of
international competitiveness incurred during the previous expansion. The economy then
gradually recovers from the recession as international competitiveness is gradually restored
through a low domestic rate of inflation.
4. A systematic countercyclical fiscal policy will reduce the short-run output fluctuations
generated by exogenous shocks to aggregate demand and supply, but it will also reduce the
economy's speed of adjustment towards long-run equilibrium, since a countercyclical fiscal
policy rule implies an automatic tightening of fiscal policy as the economy recovers from a
recession, and an automatic relaxation of fiscal policy when the economy starts to move back
towards a normal activity level following a boom.
5. An unanticipated devaluation will temporarily stimulate domestic output, but in the long run
the economy settles in an equilibrium where all real variables are unaffected by the devaluation.
Hence a devaluation is neutral in the long run because the initial gain in international
competitiveness is gradually lost again due to the higher domestic inflation rate following the
devaluation. However, in a domestic recession, an unanticipated devaluation may speed up
the adjustment to a normal activity level.
6. In practice, a devaluation is often (partly) anticipated.ln that case it will generate a bust-boom
cycle: before the devaluation the economy will be pushed into recession because the fear of
a future devaluation generates a capital outflow which drives up the domestic real interest
rate. When the devaluation occurs, output expands, even though domestic inflation also rises,
in part because of a higher expected rate of inflation. Over time, the higher inflation rate
gradually eliminates the gain in domestic competitiveness stemming from the devaluation, and
the economy returns to the original long-run equilibrium.
7. A fixed exchange rate regime is vulnerable to speculative attacks in a world of high capital
mobility. The vulnerability stems from the fact that currency speculation is virtually without any
risk under such a regime. The historical experience shows that a speculative attack can occur
very suddenly once financial markets start to doubt a government's commitment to defend its
fixed exchange rate.
A crucial characteristic of a flexible exchange rate regime is that it enables the domestic
central bank to pursue an independent monetary policy even if capital mobility is perfect.
2. Under a floating exchange rate regime the nominal exchange rate cannot serve as a nominal
anchor for inflation expectations. To provide an alternative nominal anchor, many countries
with flexible exchange rates have adopted a monetary policy regime of inflation targeting
where the central bank seeks to keep inflation within a narrow band around some target rate
which is typically set to 2-2.5 per cent. Under strict inflation targeting the central bank's
interest rate reacts only to deviations of inflation from the target, whereas flexible inflation
targeting implies that the central bank also reacts to the evolution of output and employment.
The fact that inflation targeting countries in the OECD have chosen roughly the same inflation
target suggests that these countries try to avoid a systematic depreciation or appreciation of
their nominal exchange rates over the longer run.
3. Most inflation targeting countries have delegated monetary policy to an independent central
bank to strengthen the credibility of the inflation target. When the target is credible, it will
serve as an anchor for domestic inflation expectations. The model in this chapter assumes
that agents have weakly rational expectations in the sense that the expected inflation rate
equals the central bank's inflation target. Given that countries choose (roughly) the same
inflation target, this means that the expected domestic inflation rate is (roughly) equal to the
foreign inflation rate.
4. Under flexible exchange rates and perfect capital mobility the difference between the
domestic and the foreign nominal interest rate is given by the expected rate of change in the
nominal exchange rate. According to the hypothesis of regressive exchange rate expectations,
the exchange rate is expected to rise if it is currently below its perceived normal level,
and vice versa. The perceived normal exchange rate is likely to depend on the actual
exchange rates observed in the past. The model in this chapter makes the simplifying assumption
that the perceived normal exchange rate equals last period's actual exchange rate. From
this assumption plus the assumption of uncovered interest rate parity it follows that a positive
differential between the domestic and the foreign interest rate will cause an appreciation of
the domestic currency, whereas a negative interest rate differential will generate a depreciation.
The empirical evidence lends some support to this hypothesis.
5. Under 'clean' floating the central bank does not intervene in the foreign exchange market.
Under 'dirty' floating the central bank intervenes with the purpose of reducing fluctuations in
the exchange rate. In the case of 'sterilized' interventions the central bank buys or sells foreign
currency without changing the interest rate. To have a lasting impact on the exchange rate,
interventions have to be 'unsterilized', involving a change in the interest rate which supports
the movement in the exchange rate that the central bank is trying to achieve. When the central
bank systematically raises (lowers) the interest rate in response to a depreciation (appreciation)
of the domestic currency, it is said to follow a policy of 'leaning against the wind'.
6. In a flexible exchange rate regime monetary policy affects aggregate demand both through
the interest rate channel and through the exchange rate channel. The interest rate channel is the direct impact of a change in the interest rate on investment and consumption demand.
The exchange rate channel is the impact through the foreign exchange market: when the
interest rate is lowered, there is a tendency for the exchange rate to depreciate so that net
exports increase.
7. Under flexible exchange rates a fall in the domestic rate of inflation boosts aggregate demand
through three effects. First, there is a direct positive effect on net exports as domestic competitiveness
improves. Second, a lower rate of inflation induces an inflation-targeting central
bank to reduce the interest rate, thereby stimulating investment and consumption. Third, the
lower interest rate causes a depreciation which gives a further stimulus to net exports. The
latter two effects are absent under fixed exchange rates. Hence the aggregate demand curve
is flatter under flexible than under fixed exchange rates.
8. The AS-AD model for the open economy has a similar structure under fixed and under flexible
exchange rates, but the quantitative properties of the economy will differ under the two
regimes. A priori one cannot say whether convergence on long-run equilibrium will be faster
under one or the other regime.
9. UnciP.r fiP.xihiP. P.Xc:h;mgP. r~tP.S with stric:t infl<'ltion t~rgP.ting, surrly shoc:ks will C:<'lUSP. l~rgP.r
short-run fluctuations in output but smaller fluctuations in inflation than under fixed exchange
rates. Our AS-AD model also predicts that demand shocks ( ncluding fiscal policy shocks)
will generate smaller fluctuations in output as well as inflation under flexible than under fixed
exchange rates, because a floating exchange rate allows the central bank to counteract
demand shocks through its interest rate policy.
10. When domestic and foreign assets have different risk characteristics and financial investors
are risk averse, fluctuations in required risk premia can cause fluctuations in nominal
exchange rates under floating exchange rates. Empirical evidence suggests that exchange
rates tend to move in response to shocks other than those that drive output fluctuations and
that a large part of exchange rate variability originates from disturbances to the foreign
exchange market itself. This does not support the idea that the exchange rate plays an
important role as a shock absorber.
11. Floating exchange rates tend to undergo large swings in the medium term and often seem to
'overshoot' their long run equilibrium values. Such apparently irrational behaviour may be
quite compatible with rationality. For example, financial investors may correctly anticipate that
a permanent positive demand shock requires a long-term appreciation of the exchange rate.
If the central bank raises the domestic interest rate above the foreign interest rate in response
to the shock, the exchange rate will then have to appreciate even more in the short run than
in the long run to generate market expectations of a future depreciation so that domestic
assets are no more attractive than foreign assets.
1. This chapter discussed the economic factors which are relevant for a country's choice of
exchange rate regime. The various exchange rate regimes found in the world can be cate·
gorized into hard pegs, intermediate regimes, and floating. Under a hard peg the exchange
rate is fully fixed, and the national currency may even have been abandoned as in the case of
membership of a monetary union. Under floating the exchange rate is market-determined,
although the central bank may sometimes intervene in the foreign exchange market to
moderate exchange rate fluctuations. The intermediate exchange rate regimes fall between
the hard pegs and the floating regimes by allowing some exchange rate flexibility within a
(possibly shifting) band around the parity. In recent years there has been a worldwide
tendency for countries to move away from intermediate regimes towards a hard peg or
towards floating exchange rates.
2. Macroeconomic policy choices are subject to the macroeconomic trilemma. The trilemma
arises because a macroeconomic policy regime can include at most two out of the following
three policy goals: (i) free cross-border capital flows, (ii) a fixed exchange rate, and (iii) an
independent monetary policy. Under the classical gold standard before the First World War
most countries chose to sacrifice monetary autonomy. Under the Bretton Woods system of
fixed exchange rates between 1945 and 1971 most countries maintained restrictions on
international capital flows, but since the early 1970s the largest economies have abandoned
fixed exchange rates while allowing capital mobility and pursuing independent monetary
policies. More recently the majority of EU member states have adopted a common monetary
policy and a common currency as a means of ensuring irrevocably fixed exchange rates in a
common market with free capital mobility.
3. There is currently a widespread consensus that the ultimate goal of monetary policy should be
to maintain a low and stable rate of inflation. A country may adopt a fixed exchange rate as an
intermediate target for monetary policy with the purpose of achieving the ultimate goal of low
and stable inflation. However, under fixed exchange rates stable inflation requires not only a
stable inflation rate in the foreign anchor currency country; it also requires stability of the real
exchange rate. This may be hard to achieve if the domestic economy is often exposed to
asymmetric demand and supply shocks.
4. As an alternative to a fixed exchange rate, a country may adopt a flexible exchange rate with
an inflation target to serve as a nominal anchor. Under inflation targeting the central bank's
inflation forecast effectively becomes an intermediate target for monetary policy, since the
central bank can only affect inflation with a time lag of 1 !- 2 years. If the inflation forecast
exceeds (falls short of) the target inflation rate when the interest rate is held constant, the
interest rate must be raised (lowered) until the inflation forecast corresponds to the target.
5. Proponents of flexible exehange rates with inflation targeting argue that this policy regime will
make the deviations of actual inflation from the target rate of inflation as small as existing
economic knowledge permits. They also point out that a fi:<ed exchange rate regime is vu lnerable
to speculative currency attacks. Proponents of fixed exchange rates argue that a floating
rate may be an independent source of shocks and that a stable exchange rate should be
seen as a goal in itself, since exchange rate uncertainty may hamper international trade and
investment.
6. The theory of optimum currency areas sees the choice of exchange rate regime as a trade-off
between the microeconomic benefits and the macroeconomic costs of a fixed exchange rate.
One microeconomic benefit is that a credibly fixed exchange rate reduces the riskiness of
foreign trade and investment. Further benefits are gained if exchange rate stability is achieved
by entering a currency union where the adoption of a common currency reduces international
transactions costs, improves market transparency and increases the liquidity of financial
markets. The macroeconomic costs arise from the fact that a fixed exchange rate/common
currency excludes the possibility of an independent national monetary policy to stabilize the
domestic economy.
7. The microeconomic benefits of a fixed exchange rate/ common currency increase with the
degree of international economic integration whereas the macroeconomic costs decrease
with economic integration. When integration proceeds beyond a certain point, it therefore
becomes optimal to switch from a flexible exchange rate to a fixed rate/ common currency. It
has also been argued that even if joining a currency union is not optimal ex ante, it may
become optimal ex post because the adoption of a common currency will in itself promote
economic integration.
8. Optimum currency area (OCA) theory suggests that the macroeconomic costs of giving up
exchange rate flexibility within a group of trading partners will be relatively small if there is a
low frequency of asymmetric shocks, a high degree of labour mobility across countries, and
an international transfer mechanism securing a transfer of resources from countries hit by
positive shocks to those hit by negative shocks. OCA theory also implies that the microeconomic
benefits of a fixed exchange rate/common currency will be greater the greater the
volume of trade and investment across borders. The evidence indicates that those EU countries
which have so far chosen to opt out of the Economic and Monetary Union do indeed tend
to be more exposed to asymmetric shocks and to trade less with their EU partners than those
countries which have already joined the EMU.
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