JEL No. F3 This essay considers some prescriptions that are currently popular regarding exchange rate regimes: a general movement toward floating, a general movement toward fixing, or a general movement toward either extreme and away from the middle. The whole spectrum from fixed to floating is covered (including basket pegs, crawling pegs, and bands), with special attention to currency boards and dollarization. One overall theme is that the appropriate exchange rate regime varies depending on the specific circumstances of the country in question (which includes the classic optimum currency area criteria, as well as some newer criteria related to credibility) and depending on the circumstances of the time period in question (which includes the problem of successful exit strategies). Latin American interest rates are seen to be more sensitive to US interest rates when the country has a loose dollar peg than when it has a tight peg. It is also argued that such relevant country characteristics as income correlations and openness can vary over time,

We explore a new panel data set on bilateral gross cross-border equity flows between 14 countries, 1989-96. We show that a “gravity ” model explains international transactions in financial assets at least as well as goods trade transactions. Gross transaction flows depend on market size in both source and destination country as well as trading costs, in which both information and the transaction technology play a role. Distance proxies some information costs, and other variables explicitly represent information transmission, an information asymmetry between domestic and foreign investors, and the efficiency of transactions. The remarkably good results have strong implications for theories of asset trade. We find that the geography of information is the main determinant of the pattern of international transactions, while there is weak support in our data for the diversification motive, once we control for the informational friction. We strengthen our conclusions by investigating- in another data set- the ability of our information variables to explain transactions in classes of assets with different informational content (corporate bonds, equities and government bonds). Finally, we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings.

Skeptic views on EMU are usually cast around three arguments. First, the single European currency will be harmful unless the EU satisfies Optimum Currency Area (OCA) conditions, and this is not likely to be the case except for a small number of core countries. Second, heterogeneous economic and financial structures will create undesired differences in the local impact of the single monetary policy. Third, the shift from domestic to area-wide considerations may give rise to conflicts in the decision making process of the European Central Bank (ECB).

INTRODUCTION The Maastricht route to economic and monetary union (EMU) prescribed that a process of convergence must precede the launching of the common currency into a stable economic environment. In 1991, Europe thus embarked on policies considered conducive to convergence and stability. In retrospect, economic performance over the convergence period was characterised by two key developments: inflation was brought down successfully and price trends converged, on the one hand, while unemployment soared to unprecedented levels, on the other. In addition, mirroring that drastic deterioration in the employment situation, Europe's debt/GDP-ratio increased by some 15% between 1991 to 1997. Our objective is to investigate what lessons may be learned from the experience over the convergence period. A sound diagnosis of the deeper causes of this miserable legacy is crucial. For a failure to properly understand our past follies is bound to lead to false

*Prepared for a conference hosted by Western Washington University 30 April 1999. The views expressed in this paper are those of the author. No responsibility for them should be attributed to the Bank of Canada. iii Contents Acknowledgements.............................................................................................................. iv Abstract / Résumé................................................................................................................. v 1. Introduction........................................................................................................................... 1 2. Advantages of a flexible exchange rate................................................................................ 2

4 In 2007 all ECB publications feature a motif taken from the €20 banknote. This paper can be downloaded without charge from

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We propose a comprehensive methodology to characterize the business cycle comovements across European economies and some industrialized countries, always trying to “leave the data speak”. Out of this framework, we propose a novel method to show that there is no an “Euro economy ” that acts as an attractor to the other economies of the area. We show that the relative comovements across EU economies are prior to the establishment of the Monetary Union. We are able to explain an important proportion of the distances across their business cycles using macro-variables related to the structure of the economy, to the directions of trade, and to the size of the public sector. Finally, we show that the distances across countries that belong to the European Union are smaller than the distances across newcomers. Keywords:

In 2007 all ECB publications feature a motif taken from the €20 banknote. This paper can be downloaded without charge from

We provide empirical evidence that risk sharing enhances specialization in production. To the best of our knowledge, this well-established and important theoretical proposition has not been tested before. Our empirical procedure is summarized as follows. First, we construct a measure of specialization in production, and calculate an index of specialization for each of the European Community (EC) and non-EC OECD countries, U.S. states, Canadian provinces, Japanese prefectures, Latin American countries, and regions of Italy, Spain, and the United Kingdom. Then, we estimate the degree of capital market integration (a measure of risk sharing) within each of these groups of regions: the EC countries,