Should the ECB Adopt an Explicit Exchange Rate Target?
Mäki-Fränti, Petri (2002)
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This paper investigates with a structural, quantitative macro model, whether the ECB should include the real exchange rate into its reaction function. The problem is considered from viewpoints of both the whole monetary union and a single member country with a national economy more open than the union economy on average. According to the results, the member country would benefit from the exchange rate stabilizing more than the rest of the union. It appears however, that the asymmetries of the external shocks facing the economies may be a more important factor behind the larger volatility of the inflation and output of the member country than the structural differences.