Review

This article was prepared for the Homer Jones Lecture, Federal Reserve Bank of St. Louis, March 28, 2001. The author addresses the influence of monetarism and the role of money in making monetary policy. The monetarist idea that monetary policy has primary responsibility for inflation is now conventional wisdom.

Through the post-World War II period, the U.S. dollar has been the leading currency used in international trade and debt contracts. With the creation of the euro, the dollar may finally face a challenge to its dominance in international markets.

This paper reconsiders recent empirical evidence found by Andrew Rose that countries adopting a common currency will triple their bilateral trade. The authors find that this large estimated effect is due to estimation bias arising from missing and/or misspecified time-invariant factors rather than to the adoption of a common currency.

To the surprise of many market watchers, Thailand’s exchange rate peg to the dollar collapsed in July 1997, leading to similar rounds of currency devaluations in other East Asian countries. This study seeks to determine whether there were identifiable contrasts in implementation between Thailand’s peg and a perennially successful peg—Austria’s peg to the Deutsche mark—that would have hinted at problems for Thailand prior to July 1997.

The U.S. economy appears to have experienced a pronounced shift toward higher productivity over the last five years or so. The authors wish to understand the implications of such shifts for the structure of optimal monetary policy rules in simple dynamic economies.