Living in EMU: Prices, interest rates and the adjustment of payments in a Monetary Union

Balance-of-payments problems for the EMU member countries will not vanish by virtue of the use of a single currency. This article discusses two aspects of the adjustment of payments in a monetary union that may have major repercussions for the EMU countries, for their policy-makers and for the Union's institutional design. The first aspect concerns the role of national banking systems in the adjustment process. The second is the role of changes in general price levels, and hence in the terms of trade. The two aspects are interconnected, In addition to structural features that may hinder changes in interest rates and the terms of trade in the EMU, the presence of institutional commitments of member countries that may work perversely is considered.