OPEN-ECONOMY MACROECONOMICS - DEVELOPMENTS IN THEORY AND POLICY

This paper views developments in open-economy macroeconomics through t he lens of the debate over European monetary unification. The empirica l tendency for nominal exchange rate regimes to affect the variability of nominal and real exchange rates alike can be rationalized by stick y-price theories or models of asset-market liquidity effects. But plau sible liquidity models have difficulty generating enough persistence t o match the data. Thus, the macroeconomic stabilization costs of forgo ing the exchange-rate realignment option seem pertinent. It is argued that our theories of efficiencies due to a common currency remain unsa tisfactory, despite recent advances. The paper concludes by reviewing theories of currency crisis.