Exchange Rate Policy Options of the European Central Bank (PDF)

Essay from the year 2003 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,4 (A), Oxford Brookes University (Business School), course: International Investment & Finance, language: English, abstract: Since the euro has been introduced as the common currency of the
European Monetary Union (EMU) exchange rate policy-making has not
been noticeably mentioned on the agenda of the European Central Bank
(ECB). This work examines and explains the development of the euro
since its introduction in 1999. A discussion of possible exchange rate
regimes, their impacts on domestic and international trade and living
standards, as well as a brief introduction on market intervention will put
forward a recommendation to the ECB for its future exchange rate policy.
Since most of the past currency crises emerged from monetary systems of
fixed exchange rates, empirical data suggests a non fixed external regime
to the EMU, even more since this allows a range of steering and
counteracting opportunities.
Following the Keynesian monetary theory, the forces of supply and
demand are not always sufficient to guarantee a stable and sound
economic environment for successful trade and growth. Therefore a free
floating system of exchange rates might not be the right way for the ECB
to follow its aim of price stability and competitiveness in a highly
integrated area as the EU.
We recommend employing an external managed floating system at a
reasonably high level of currency value, i.e. purchasing power, depending
on the situation of employment and export-import balance. The ECB
should carefully carry out market interventions, limited by international
exchange rate agreements, e.g. by the G-10 Nations summits.