Rudiger Dornbusch

"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 (Economic and Monetary Union of the European Union) 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."

"Monetary policy affects the ... of goods and assets and (iii) effects through changes in explicit or implicit real interest rates on aggregate demand."

"Italians dream that the ECB (European Central Bank) will make their life easier than the Bundesbank does now... The new central bank is certain to establish itself at the outset as a direct continuation of the German central bank."

"The model retains the uncomfortable property that any increase in demand for home output ... leads to nominal and real appreciation... The uncomfortable fact remains that even in this model there is a short-run tendency for an expenditure increase to induce an appreciation... Expansionary fiscal policy will lead to an initial depreciation of the nominal and real exchange rate if ... (it) is accommodated by an expansion in nominal money."

"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."

"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 (and pressure on the European central bank to inflate) will predominate."

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

"On my first trip to Chile, I went to the ministry of finance to meet with the minister and the deputy minister, and behind the deputys desk were two photos -- one of Chiles president and the other of Rudi."

"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."