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A Market-Based View of European Monetary Union
l,{. Lee Hoski ns , pres i dent
Federal Reserve Bank of Cleveland
Conference on
The European Monetary System:
Its
Consequences for the Unity
of Europe and for the
International Monetary System
Organized by
the Instituto
Economia de Mercado
Avi I a, Spal n
March 3l-Apri 'l I I989
,
de
A
MARKET-BASED
VIEI{ OF
EUROPEAN MONETARY T'NION
by
IJ. Lee Hoskins
President
Federal Reserve Bank of Cleveland
April 1,
1989
Relatfvely slow growth and high unemploynent over the past 10 years
suggest thaÈ the European Economic CornurunÍty has noÈ grown
potenÈial.
Many obserr¡ers
at its true
aÈtribute this shortfall--aÈ least ín part--to
restrictions, regulations, subsidies, and income guarantees Ëhat distort
markets and produce
renewed cor¡mitment
economic
inefficiencies wichin Europe.
integration, as Eacit
of restrainÈs in which
Pursue Èhe nost
view Europe,s
to policy coordinaÈion, with its interesc in eventual
acknowledgment
Policy coordinaÈÍon, however, is a
che web
One rnight
r¡e have
of a problen.
Èwo-edged
sword. It can cut
through
tied world markeEs, freeing them to
efficient allocation of resources. Or, it can sever
Ehe
incentive and informatíon,processes thaË markets uniquely possess, killing
hope
how
of maximizing production,
it will wield this
emplo¡rmenE, and
any
exchange. Europe nust choose
sword.
The drive to remove restrainEs on Ehe free flow of products, labor, and
capítal wÍthin the
EEC
is the most important goal. Subject to certain caveats
2
about polÍcy coordinaÈion, the slngle European market pronises exchange,
productÍon, and emplo)rnent opportunitles that are more conslsËent wfth
Europe's
potentÍal.
These gaÍns stem from
free markets and crade, with or
wlthout e monetery union. Nevertheless, a monetary unlon could supplement the
single narkeÈ by providing furrher efffciencies in che use of money.
Unfortunately, a well-known conflict exisËs between monetary union
exisEing European Ínstitutions.
exchange-rate nechanism),
and
Fixed exchange rates (as under the
free capital
movemenÈs
(as under a slngle market)
and national monetery sovereigncy are incompatible. The
EEC
nust then
make a
choÍce: sacrifice one of chese three to protect the other Èwo. My Èask is to
offer the observations of an outsider abouE thfs choíce, about Èhe
alternaÈlves this dlleurma presents, and abouÈ lts irnplications for both the
European l'fonetary Systen and
the international financial
As many European leaders have noted, Europe
degree
of polltÍcal, social, and cultural
monetary sovereignty and
effect a full
will not
communi¡y.
soon achieve the high
1nÈegratÍon necessary
moneËary
union. under
to relingutsh
these
circumstances, floating exchange rates offer the best meens of maximizing
efficfency gains from a single market and free capiÈal movements.
floatíng rates do noE preclude an eventual moneÈary unÍon,
che
Moreover,
UltimaEelY, we will judge the success of any monetary union in Europe by
Èhe
long-term real growth and employment Èhat it fosÈers. As I will
Èhese depend more on Ehe exÈent
labor,
and
argue,
to which Europe liberalizes iÈs product,
capital markets than on the
advantages
of
moneEary union.
3
The European Economic Community
is inltiating
some 300
actlons co
remove
physical, Èechnlcal, and fiscal barriers to freer markets. Ttre removal of
these barrlers Èo the
free flow of products, services, labor,
and capiÈal
pronises enormor¡s gains from speciallzation, conpetiËlon, and economies of
scale. Already firns in
to take
of wíder markets. Nevertheless, the removal of barriers
advantage
member sÈates
These
Europe are consolidating and investing
is not
enough
require thaÈ the
individual
members and
EEC
in itself to
guarantee
go beyond Ehe removal
âmong
overall efficiency gains.
of barriers ¡nong its
adopt more general policies that liberalize markets
and
chat aIlow prices Èo convey inforrnation about relative scarcltÍes. Two widely
discussed concerns along these lines have
to
with the "leve1ing up" of
do
regulaËion and the creation of barriers to external Èrade.
Many observers,
especlally the British, have expressed concerrt thaÈ, in
the drive toward a unified Europe, a pattern of supranaÈional regulaclon
and
subsidization will supplant Èhe concept of a single liberalized narket.
InsEead
of breaking
Community
down
barriers, restrictÍons,
and conÈrols, the European
could "leveÌ them up," creating a new bureaucracy
and
competition-sÈifling patronage within the
"o*r,rnicy.l This kind of policy
coordination would limit potential gains in production, employment, and
exchange opporÈunities
in Europe. Replacing 12 individual markets wÍth
a
single rnarket does not, in icself , diminish renÈ-seeking, as r¡¡e have seen with
Europe's
Common
Similarly,
Ehe cornmunity
Agricultural Policy.
some
of us from outside the
European CommuniEy wonder whether
will restricE external competition. Over the pasE 40 years,
Ehe
4
trading world--ofEen led by the EEC--has lorvered Èariffs and removed quotas.
But after substantial gains during the 1950s and 1960s, the progress slowed.
Although Èhe overall level of inport restrainÈ night noÈ be hlgher now Èhan 40
years ago, trade restrainÈs remain an important feaÈure of European and
worldwide trade.
Moreover, these restraints have become nore sophlsticated,
more discreÈionary, less visible,
than the traditional
tariffs
and even less responsive to market forces
that they replaced.
All current rhetoric aside, the Erading world lacks fírm coumitment to the
principles of free trade.
We
live in a neo-mercanÈÍlist environment where
market access ofËen is more a function of bilateral,
product-speclfic
negoÈiating skills than the result of competitive sErengths. Such types of
policy coordÍnation have enormous cosÈs.
A further concern, which has not received enough attention, focuses on
price-level stability.
The EEC could enhance the gains from a single market
if its members adopted a stable-price policy.2
Inflation
itself
involves
costs ln terms of nisallocaEed resources. It adds "noisen to prices, which
distorts the informaEion about relative scarcities conveyed through price
changes. Through interactions v¡ith tax systems, inflation
investment and financial decisions.
inflation
can affect firms,
Ifhile these costs are greatest
is high and variable and difficult
when
to predicÈ, they are presenc at
Ehe moderate levels observed in the united staËes and the EEC today.
Inflation also leads to che creation of socially inefficienc instÍtucions, .
designed to ProtecE individuals against inflation-induced
financial assets.
We
losses on money and
would see far fewer transactions in futures markeÈs for
exchange rates and interest rates in an inflation-free
world.
5
Flnally, evidence froru a large set of countries, wiÈh very dffferent
lnstltutions and econonlc condicions, lndfcaÈes thaE persiscenÈ lnflaclon
erodes long-term econonlc
growth.
The
inefficiencies
and dlsÈorÈfons
wlth inflaclon reduce resources available for capital fornatÍon
associaÈed
encourege investments thaÈ have qulck payback perlods,
and
rather than longer-Èentr
groe¡th poEential.
The creation
of a slngle
European market, together r¡1ch a more general
of a liberal-market philosophy
acceptance
and a commitment Èo zero inflaÈion,
r¡ill confer substantfal gains on Europe, with or without a moneÈary union.
To
be sure, however, a s¡rmbÍotic relationship exists between a single ÍnÈernal
markeÈ and a monetary
union. A monetary union could enhance the beneflÈs of
a
single internal rnarket by providing efficiencÍes in the use of Eoney, and a
single internal narket could strengchen a com¡nÍtment to price stabillty
throughout Europe. Of Èhese two, Èhe creation of a single internal market
undoubtedly
is the
more imporËanÈ. Beyond the
efficiency gains that I
have
descrÍbed, iÈ Ís Èhe sine oua non of monetary union.
rndencifying rhe potenËial gains from nonecary union ls easy,
buÈ
achieving them--if they are at all achievable--is quite a different matter.
The
EEC
heads
of
sËaÈe charged
the Delors
examining and proposing sËeps Èolrard a
Commission
wíll reporc its findings in
importance and the urgency
of
Commission r.¡ith
co¡nmon moneËary
June
1989.
the arduous task of
polÍcy in Europe.
One can
appreciate
Ehe
Èhe Commission's work by considering.the dilenna
Èhat a single European markeË poses under existing European institutions.
Illany economists have noËed,
The
the objectives of free capital
by the single market, of relatiwely fixed
exchange
movements
rates as provided
As
as sought
Èhrough
6
Èhe exlsElng exchange-rate mechanism (ER.}{), end
of
moneÈary lndependence among
sovereign nations are mutually lncompaÈlble. Hlscory suggescs that caplCal
flows usually bear the burden of resolvtng thfs incompatibilicy.
l{ill che indfvfdual
mernber counÈries
of the
EEc gfve up
thelr natl.onal
sovereignty over Donetary policy? My guess 1s not ln the foreseeable future.
llhat then are
Èhe
alternatives for the
Can Eurooe Afford the
One
European Economíc conmunlty?
EMS?
alternative ls to go forward with the El,fS. However, Ëhe present EìMS
policy of attempting to maintain fixed central
flexibility
around them
will prove
more
exchange
dífficult as
rates with lirnited
Europe
liberalizes
capital flows. Theory Èells us that indívidual countries cannot conduct
ÍndependenÈ monetary policies under a system of rlgfdly held exchange races
wich free capital urobility. Countries that inflate their economies above the
average leveI
deficit
of their tradÍng partners wÍ11 incur a balance-of-payrnents
will tend to lose reserves. Countries wÍth relatively low
inflation rates will tend to gain reserves. The inflacion-prone countries
and
will experience a subsequent monetary contraction, while
Èhe
laËter will
experience a monetary expansÍon.
AIso, as this discussion suggests, a system rvith nobile capiÈal and fixed
exchange
rates leaves countrÍes vulnerable to external rnonetary shocks.
Èhe Bretton l.Ioods
fixed-rate
sysÈem, many countries--notably Gerrnany and
France-'complained about importing
late
1960s and
Under
inflation from the United
Stat.es during the
early 1970s. Only as long as member countries have similar
preferences for inflacion are fixed exchange-rate mechanisms sustainable.
7
Most observers would agree Èhat European pollclmakers do not give
sinilar
weight to inflatÍon in formulating Èheir monetary policies. Overall,
Germany
sErives for a lower rate of inflation than
Alchough
fnflatlon differentials
other European
mosÈ
governmencs.
anong Èhe European countries have narrowed
since the early 1980s, thís developmenÈ does not represent a convergence
European policymakers Èo
a similar enphasls on Ínflatlon.
Inconpatible
inflacion obJecclves often contribute to substanÈlal capical flows
participants and to rearignments of the ERM. Moreover, inflaÈfon
differentials
seem
to
prevenË more European countries from
to resolve this incompatibÍlity
AttemPts
between
among
arnong
joining the
ERM
ERM.
liberal capital
national monetary sovereigntT, and fixed exchange rates through
more policy coordination can add to market distortions ËhaE lower enplo¡rment
movemenÈs,
and
outPut.
The
desire co limit exchange-raÈe fluccuatlons and simulÈaneously
Èo maintain monetary independence,
for
countries to restrict the cross-border
example,
hisÈorically has encouraged
novemenEs
of capital. Capical concrols
played an integral role in the functioning of the Bretton Lloods exchange-raÈe
sysËem;
in fact,
Èhe rMF encouraged
balance-of-payments problems.
for the oPeration of the
'snake."
ERM
of
One
ceurporary
Similarly, capital controls
European Comrnunity's ERI'! and
have been inporÈant
ics predecessor,
the
recent study credits the stability of exchange retes under the
primarily to
monetary
their use in cases of
Èhe use
of capiÈal controls, raËher than
polÍcÍ"".3 Th""e capital conÈtols introduce
chey raise the cosÈs
of
invescmenE
capital
Eo
firms,
Èo the coordinaËion
nany distorEions:
reduce hedging
possibilities, lower returns to savers, induce undesirable
financial srructures, and encourage rent-seeking.4
changes
in natíons,
8
CounEries also have resorted
wey
to
exchange-market intervention as a possible
to resolve the problems thaÈ fixed
exchange reÈes
pose. In
Èheory,
nations could achieve fixed exchange retes, capiÈal nobility, and monetary
auÈonomy
Ëhey do
lf they had additional
independent
policy instrunents, but of
course
not. In practice, countries have used exchange-narket intervention
believing that it affords--at least Èemporarily--an extra degree of
UnfortunaÈ.e1y, available research sÈrongly suggests Èhat
freedom.
sterilized
inEerrrention (ÈhaÈ is, intervention with no monetery consequences) does not
provlde counËries with an addicional policy lever through which to pursue
exchange-rate
target. Intervention can alter
sterilized, but such lntervention Írnplies
Èo exchange-race
objectlves.
Some
exchange
races, if lt ls not
sorne subjugation
of inflation
goals
observers even contend chat interventlon
creates uncerÈaÍncy in the market Èo the exEent that it raises doubts
Èhe
an
future course of monetary policies or that iÈ eÈtenpts co offset
abouÈ
market
fundamentals.
The
dilernma
ability to realign central parities allows a possible solution to
that capital mobility
and naÈional sovereignty pose,
but
1È
also
Ehe
can
introduce new problems to the systern. Realigrunents of fixed exchange raËes
imply that countries know che correct, or equilibriun, values ac which to
Usually the
ERM members
have resorted
to realignments broadly designed to
correcc for exiscing ínfIaÈion differentials.
enjoyed little
success
UnfortunaÈely, economists have
in speclfying the relaÈlonship
beÈween
the so-called
market fundamentals (including inflation differenÈials, real interest-rate
differentials,
and currenE accounts) and spoÈ exchange raEes.5
occasion--mosc notably
peg.
in January L987 --the
realignmenÈs seemed
On
to be the
9
of lntensive negotlations, especfally
producE
between France and Germany,
rather than che result of an "arm's length" reading of narkeE fundamentals.
Because such renegotiations cannot promise
to
produce a market equilibrfi.un
value for exchange reEes, they can inÈroduce real-resource
In addition, a co-'nitment to
defend exchange raÈes
cosÈs.
risks the
danger of
what I call monetary protectionlsr¡. As proEectionist measures against trade
capital flows
and
co¡ne down, does Èhe
temptatlon to protect home markeEs
through moneÈary manipulations noÈ groer stronger? Under a commiÈment to
maintain a peg, counEries with relatively low inflation races night accumulate
Èhe currency
of high-inflaÈion councries. Obviously, low-inflation countries
linic the extent to which chey will do Èhis, slnce inflatÍon erodes
purchasing power
of these reserves. At
some
Èhe
point, countries acctrmulatÍng
reserves will exchange them back with the more inflacionery countries,
resulcing ln eicher a change ln policy wlthÍn the more lnflatfonary countrÍes
or an alceration of
My
does
exchange rates.
point, however, is thaÈ such a sysÈem--unlike floating
not
embody any smooth
or
auÈomatic rnechanisms Èo assure
exchange rates--
adjustment. At
leasÈ in the interin period, the coordinated efforts to fix exchange rates
wíll insulate
insEead
exchange raEes from
reflecting underlying market pressures
and,
of boctling up inflation within the more inflationary countries, will
Èransmít
it to others. Under these circurnstances, fixed
ProtecË Èhe claf.ms
imports.
Because
of high-Ínflation count.ries Eo world resources
it
prevenEs an automaEic depreciation
countries' currency, maintaining
uhe peg keeps
cheap.
some Èime,
The
exchange rates
result, at least for
through
of the inflating
foreign goods artificially
is a disruption of trade
and
10
invest¡nent across countries from what the market ocherwise would have
produced.
Consequently, any economic comrnunity chat wishes co
Èrade and
capital
movements can maintain
policy
benefit fron free
independence
the adjusÈments co occur through exchange reces. If
only tf lt allows
Germany and France adopc
policíes that create a 10 percentage-point differential
beÈween
their
lnflation rates, the ERM nusE allow for exchange-rate adjustnents of
comparable magnitude. Barring
costs that the
CommunÍÈy
this, the EMS has the pocenÈial to inpose real
cannot afford.
Flexible Rates and the Ouestion of Volarílity
Another
flexible
alternative, as inplied above, Ís to
exchange
move
rates, or to a regime of floating
to a sysËen of
exchange
rates.
alternatlve reduces the poËential disruptions to markeE-driwen
more
This
ouÈcomes and
therefore seens more compatible with che single-market goal.
Critics of floating (or
more
flexible)
exchange
rates, however, argue that
the resulËing exchange-race volatility reduces the free flow of resources
,moDE
different countries in a single narket. Th"y concend Èhat exchange-reÈe
volatility creates uncertaintsy.
Greacer uncertainty
buslness and the required reÈurn
for undertaking rísky investments.
raises the costs of doing
The the
higher cosËs and riskiness of business reduce international trade, investment,
and emplo)rmenÈ.
This criticism seems flawed. Firsc, exchange raEes are
endogenous
variables, which are ultimaEely responsive Èo naÈions' policies.
Much
of
the
11
volací1ity of
exchange raÈes
reflects the volatiliÈy
and
lncompatiblllty of
underlying policies. UncerÈaínty created on this accounÈ is a by-product of
policy
and would
exist under fixed
economists regard exchange-rate
exchange
rates. Nevertheless,
many
volaclllty as excessive--the result of
overshooÈing, bubbles, and destabÍlizing speculation. Although
volatility
may
creace some ÍnefficiencÍes, these inefficiencies pale in comparison to the
market distortlons that could resulE from an aÈtempt Èo peg
at
en
inappropriace exchange rate, or from attempts Èo maíntain fixed exchange rates
through capital controls. Markets for other assets exhibit slmilar
volatilÍty, yet
Second,
we do not peg
volatility is not
their prices.
synonymous
wich uncertaincy, although observers
often use the terms interchangeably. Under floating exchange rates, firms
can
hedge, alÈhough not conpletely, against the risks imposed by this volacÍllcy.
Under
flxed
and Èiming
These
exchange raÈes,
of
risks
the market can become uncercain of the
adjustments when
seem more
rnagnitude
it judges existÍng rates to be inappropriate.
difficult to
hedge and can
result in inefficient
resource allocaËions. Ironically, speculators usually are more cercain about
the direcÈion of change and are often assured of profits.
of no concrete
evidence
Finally, I
that links exchange-rate volacility, as I
have
described it, l"tith a reduction in trade, investmenE, or emplo¡rm.nt.6
On Nat.iona1 SovereÍsntv and
a European Central
Bank
As the last alternative, I wish to observe thaE European Economic
Community could maintain Ehe
current ERlf structure with an increased
am aware
L2
liberallzation of capital flows, lf individual counËries
national monetary sovereignty.
to
Peg
One way
dominanÈ-currency country uhen would detemine the
lts
monetary
policy, and the
EEC
such as Germany. lhe
overall lnflation rate
oEher countries would maintain the
exchange-race pegs through cheÍr moneEary
the
thelr
to achleve chis requÍres all countries
their currencies Èo a domÍnant-currency country,
Èhrough
gave up
policies. I doubt, however, that
partlcipants would acquiesce Èo such a commitment, at least in the
near future.
Some
counEries could
economies thac are
benefit from such an arrangement. For small,
open
heavíly dependent on trade wlth the donLnant country,
such
an arrangemenÈ uríght create more stability in Èrade volumes and príces. It
could reduce their vulnerability to speculation and limit the need for forward
cover. All of thÍs
game, and a
assu¡nes, however,
willingness to accept the
Many observers argue Èhat
a sÈrict adherence to the rules of the
moneÈary
disinflaÈion efforÈs. Under fíxed
most sEable values tends
inflating countries,
dominanÈ country.
a fixed-exchange-rete system exercíses
disclpline on Ínflation-prone councries
with the
policy of the
and enhances
exchange
to
asstrming again
e
the credíbility of their
rates, currencíes compete.
dominaEe and extend
a discipline
on
that the inflation-prone counEries
to the rules of the game. Typically,
however, the
Those
adhere
rules are broken.
Inflation-prone countries alter exchange rates and restrict the free flow of
capital to avoid adjustments. Moreover, experience suggesÈs that the world
tends to view the rapid depreciaÈion of a country's currency as an indicator
13
of inappropriate policy.
ConsequenÈly, t,o
the
exEenË
that world opinlon ever
constrains the economic policies of sovereÍgn states, inflation disclpline can
exist under floating
exchange rates.
"AdJustment as)mmetrÍes" are another source
of
European reluctance
to tie
to a domlnant currency. Fixed raËes--if maintained r¡itìout capital
controls--would force high-inflation counEries to adjust to Èhe lower
inflation rates of their crading partners. this ofÈen proves politically
difficult,
which
is
why
inflation-prone countries do nor adopt them to begin
wich. Fears that these so-calIed
adjusÈment asymmeÈries
will
become more
Pronounced as che EEC loosens capiEal resÈraints have prompted
creation of a
EuroPean currency issued through
a central bank implÍes thaÈ all
governments
calls for
a European central bank.
the
Such
relinquish their sovereignty over
policy, but thaÈ each would maintain a voíce in establÍshing a common
European monetary polícy. Some weighted-average inflation preference would
monetary
prevail.
Such compromises
in
Ehe
pursuit of economic policy coordination
the essence of politics, but the bane of
economic
efficÍency and stability.
I do not wÍsh to argue that a European central bank--or any central
for that matter- -could not successfully
opportunities, but its ability
Eo do
are
bank
maximize produc:ion and employment
so rests on the acÈainment of
conditions. First, the EEC must give its central bank
two
compleÈe autonomy from
financing the fiscal policies of the individual European scates and of the
community
in general. A large
governments sPend Eoo much,
The reasons
body
of research strongh'
particularly relative
suggesËs that
Èo gheir
ability t.o tax.
relate to the nature of publicly supplied goods,
Ëo
the incentives
wichin bureaucracies, and to the nature of poliEical conpromise. The benefÍcs
L4
of
goverrunent expenditures tend
polfcically
aÈ
asÈute groups,
to be concentraEed on indentifiable,
while the costs are dÍffused throughout the public
large. By financing expenditures through che sale of chelr debt to central
banks, governmencs can reduce che real value of their outscandlng debts
through subsequent Ínflation.
ThÍs inflatlon tax, although highly fnefflcient
and distorËional, nevertheless
is relatively lnvisible
hence
Èo
the elecÈoraEe;
its aÈtractiveness.
Ihe second condition for the successful creation of a
bank requires
stability.
European cenÈral
that it maintain the value of lts currency by promoting price
Governments
often
demand
too much of monetary policy. I have
already referred to problems of atÈempting Èo stabíl-íze exchange rates 4g!
conduct domestic monetary policy. A more common, yet less recognized, problern
occurs when countries attempt Èo sÈabilize the business cycle. Sometímes
policymakers balk
at eli¡ninaÈing inflation
because they believe
that a
Èrade-
off exísts
beÈween
policy
the evidence supporting its effecciveness are weak. Nevertheless,
and
even granting
inflation
and unemployment. The
theoretical basls for
such
that nore inflaEion could lead to a tenporary increase in
employment, there seems
to be a
Eendency
for such policies to ratchet
inflacion upward. In the 1970s, the rate of inflaÈion at the business-cycle
crough tended
to rise with
each
cycle.
The resulËlng reductions
growth probably outweighed any short-term gains
Under conditions
of
auEonomy and
in
in long-term
emplo)rment.
price stabilicy, a European central barrk
could be a useful and natural extension of che single European market.
many European leaders have
complete economic and
As
pointed out, however, monetary union presupposes
political integration of Europe.
Europe
is not likely
a
15
Èo achieve such a close degree of inËegration in che near future.
Perhaps the
long run holds more promise, if Lord Keynes' famous dictun does not crap
us
first.
Eurooe anrl the Tnternetíonn'l Fínnncíe'l Commrrnltv
I
have previously expressed concerns about att.empcs by the G7 councries to
coordínate macroeconomlc policy and to create exchange-rate carget zones for
yen-dollar exchange rates.T The creation of a
Èhe mark-dollar and
monetary union could have the unforÈunate consequence
for these polÍcies.
Even when sovereign
of increasing
interrelationships
among
policies?
but
policy levers
and economic
variables, are almost
economy
works, can r{re expect
to agree on and implement coordinated, effective
One
macroeconomic
also mighc wonder about the outcome if the world cooperated,
of
how Ëhe world
works. This of course is
at the naËional level,
buE the cosÈs
of an error increase sharply
adopted the wrong model
problem
The sharp differences
true state of the economy, and about the
legendary. If economists cannot a9tee on how the
governments
support
countries q.g Èo coordinate
policies, they night not be able to do so effeccively.
¡moîB economisÈs about Èhe
European
we ext.end the scope
of coordination to
fínancial
in general.8
Many
communicy
Europe and
to the
a
as
inEernaÈional
of these proposals call for a deÈailed harmonization--a fine tuning
on a grand scale--of monetary, fiscal and regulatory powers. It remínds
me
of
policymakers'efforts aE "fine truning" in the 1960s and 1970s, when they
aËcempted
to achieve
shifted frequently,
many
targecs simultaneously. The thrust of polÍcies
and those
policies generally
missed on
all accouncs.
The
16
Earkets' mistrust of polÍc¡rmakers was reflected In an inflationary psychology
ÈhaÈ complicated and extended
the fight againsÈ inflacion.
subordinaÈe donesÈic objectives
to lnternatlonal targeÈs
If ne now
and evenÈs, econonfc
agents once again could lose confidence Ín the wlllingness and the ablliÈy of
to pursue important
polÍeyurakers
domestlc goals.
Conclusion
Policy coordínatlon must play an essentlal role in process of
unification. In developing proposals for a single market
and
European
for a monetary
union, I urge coordination of efforts to free markeÈs and Èo expand
and productÍon
exchange
opportunities. That these markets extend across European
boundarles only serves to enhance the galns from such coordfnaÈed polfcies.
We
should slmilarly explore opportunitfes for internaÈional coordination that
enhance the performance
againsË forms
of free,
compeËiÈive
markets. I caution,
of policy coordination, both in
however,
Europe and throughout the
internaÈional community, thaÈ strive Èo supplant markeÈs and limic Èheir
discipline.
l.Ie simply cannot
afford
them.
T7
I fhÍ" view is found in Nigel Lawson's speech at
Incernatlonal Affairs on January 25, 1989, entitled
Financial
Arena?"
t
'See
Èhe Royal. InsÈiÈure for
"Whac SorÈ of European
t{illian T. Gavin and Alan C. Scockman, "The Case for Zero
Economic Conmentary, Federal Resen¡e Bank of C1eveland, Septenber
Inflation,
15, 1988.
"
a
'Miche1e Fratiannf, "Îhe European Monetary SysÈen: Horr Well Has It l.Iorked?"
The Cato Journal, Vol.8 No.2 (Fal1 1988): 477 -501. See especially page 483.
4see
Jacob A. Frenkel and l'lorris Goldstein, nThe International MoneEary
Systexû: Developments and Prospects, " The Cato Journal, Vo1.8, No.2 (FatI
1988):285-306.
5 S"" Richard A.
Meese and Kenneth Rogoff, nEmpirical Exchange Rate Models of
Seventies:
Èhe
Do They Fit Out of Sample?" Journal of International Economics L4
(1983)
i
3-24.
6 sa"
and llorld Trade," A Srudy by the Research
"Exchange Rate Volatility
DeparEmenu of the International MoneÈary Fund, Occasional Papers No.28, July
1984.
7". L""
Hoskins, "International Pollcy Coordinauion: Can f.Ie Afford It?'
Economíc Commentary, Federal Reserve Bank of Cleveland, January 1, 1989.
SSee
Jeffery A. Frankel and KaÈherine RockeCt, "InÈernaÈional Macroeconomic
Policy Coordination l.Ihen Policymakers Do Not Agree on the True Model, " AEC-fu_
Economic Review, VoI.78, No.3 (June 1988) :318-40.
@FedFRASER