Exchange Rate Policy Options of the European Central Bank

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 theEuropean Monetary Union (EMU) exchange rate policy-making has notbeen noticeably mentioned on the agenda of the European Central Bank(ECB). This work examines and explains the development of the eurosince its introduction in 1999. A discussion of possible exchange rateregimes, their impacts on domestic and international trade and livingstandards, as well as a brief introduction on market intervention will putforward a recommendation to the ECB for its future exchange rate policy. Since most of the past currency crises emerged from monetary systems offixed exchange rates, empirical data suggests a non fixed external regimeto the EMU, even more since this allows a range of steering andcounteracting opportunities. Following the Keynesian monetary theory, the forces of supply anddemand are not always sufficient to guarantee a stable and soundeconomic environment for successful trade and growth. Therefore a freefloating system of exchange rates might not be the right way for the ECBto follow its aim of price stability and competitiveness in a highlyintegrated area as the EU. We recommend employing an external managed floating system at areasonably high level of currency value, i.e. purchasing power, dependingon the situation of employment and export-import balance. The ECBshould carefully carry out market interventions, limited by internationalexchange rate agreements, e.g. by the G-10 Nations summits.