Abstract
We examine macroeconomic stability and the properties of the international transmission of business cycles under three exchange rate systems: a flexible, a unilateral peg (EMS) and a single currency (EMU). The subjects of study are Germany and France. In France, macroeconomic volatility under EMU is comparable to that under a flexible exchange rate system but considerably lower than that under EMS. In Germany, output volatility is significantly higher under EMS—relative to the flexible regime—and increases even further under EMU. Inflation, though, becomes more stable. EMU also induces a strong negative international transmission of country specific supply shocks and amplifies their role. This fact may complicate ECB policymaking.
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