ABSTRACT
Feldstein (1992, 1997) invokes Friedman's (1953) classic case for flexible exchange rates to argue that the single currency of the European Monetary Union will hinder adjustments that might have occurred through real exchange rate movements under a more flexible exchange rate system. The extent of local-currency pricing among European countries undermines this view. The prices that consumers pay for imported goods are not much influenced by changes in nominal exchange rates in the short run. The channels for adjustment through relative price changes are considerably narrowed when local-currency pricing predominates. New evidence is presented that reaffirms the predominance of local-currency pricing for consumer prices in Europe. The optimum currency area analysis is reexamined in a Mund ell-Fleming framework with local-currency pricing.
