EMU, Monetary Policy Interactions and Exchange Rate Stability

EMU leads to the elimination of monetary policy coordination failures within the euro area. Whether this translates into more transatlantic exchange rate stability depends on the origin of economic shocks. Martin's (1997) conclusion that EMU will lead to more stable exchange rates is shown to hold for both symmetric and asymmetric shocks in Europe, but not for shocks that originate outside Europe. The results remain valid when taking into account that the pre-EMU era was characterised by a Bundesbank-led ERM, rather than a free float. Finally, the results are checked for a future expansion of the euro area.