Emu and Transatlantic Exchange Rate Stability

The impact of EMU on the transatlantic exchange rate stability raises the more general question of whether the exchange rate is a useful adjustment instrument or source of instability. We estimate a simple, three-country model for the United States, Germany and France, over the 1972-1995 period. Then we compare EMU, the ERM and a floating regime through stochastic simulations. We show that EMU could reduce the variability of the transatlantic exchange rate compared both to the ERM and to a floating regime, even if the removal of shocks to the intra-European risk premium is not attributed to the regime shift