Why did the EU countries move away from the EMS toward the goal ...

[rachel9]

Why did the EU countries move away from the EMS toward the goal of a single shared currency?
 
  What will be an ideal response?

Question 2

No central bank can be indifferent to its currency's value in the foreign exchange market. Discuss.
 
  What will be an ideal response?

[epscape]

Answer to Question 1

(1 ) To produce a greater degree of European market integration by removing the threat of EMS currency realignments.
(2 ) Reduce German dominance of the EMS monetary policy.
(3 ) Given the move to complete freedom of capital movements within the EU, fixed but adjustable currency parities, may lead to ferociously speculative attacks, as in 1992-1993.
(4 ) To guarantee the political stability of Europe.

Answer to Question 2

 despite the Monetary Policy Autonomy theory of the original supporters of floating exchange rates
 exchange rate's role in inflation
 prices are sticky in the short run, so foreign developments can affect real interest rates and real exchange rates at home
 don't want their exchange rate to be too volatile as it affects the demand for their domestic products
 appreciation or depreciation can cause inflation that is difficult to counter
 banks intervene on a discretionary basis so it is still necessary for them to continue to hold foreign reserves
 dirty floats stabilize output and price level after shocks that affect exchange rates
 empirically: after 1973 countries have continued to intervene to affect exchange rates

[rachel9]

Thank you

[epscape]

No problemo