Macroeconomic Policy and Capital Controls

Abstract

In this chapter we turn to the issue of how European financial liberalization will affect monetary and fiscal policy. There is a large and growing literature on the consequences for macroeconomic policy of moving towards economic and monetary union (EMU). Much of this literature stems from, and seeks to extend, the analysis of the experience of ERM (exchange rate mechanism) countries in the 1980s. The central question addressed is what is entailed in going from the ERM to EMU. The removal of capital controls is seen as the critical intermediate step.