"The paper develops a simple macroeconomic framework for the study of exchange rate movements. The purpose is to develop a theory that is suggestive of the observed large fluctuations in exchange rates while at the same time establishing that such exchange rate movements are consistent with rational expectations formation. In developing a formal model we draw on the role of asset markets, capital mobility, and expectations that have been emphasized in recent literature."

“The most likely scenario is that EMU will occur but will neither end Europe’s currency troubles nor solve its prosperity problems.”

“If there was ever a bad idea, EMU it is.”

“Once Italy is in, with an appreciated currency, the country will soon be back on the ropes, just as in 1992, when the currency came under attack.”

“The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”

“The most serious criticism of EMU is that by abandoning exchange rate adjustments it transfers to the labor market the task of adjusting for competitiveness and relative prices... losses in output and employment will predominate.”

“In figure 3 we show the money and domestic asset market equilibrium schedules for given stocks of each of the assets. Along MM the domestic money market is in equilibrium. Higher interest rates reduce money demand so that equilibrium requires a depreciation and thus a rise in the domestic currency value of foreign assets and - hence wealth. The exchange rate thus plays a balancing role by affecting the valuation of assets.”