Interdependence, that is, outcomes depending on what is done by more than one actor, is a fact of life for central banks, reflecting domestic and international pressures, both political and economic. National economies have become increasingly internationalized through trade in goods and services and in currencies too. In consequence, the economies of large as well as small countries are now shaped by actions abroad as well as by decisions at home. While interdependence is a fact of life, what governments do about it depends on political choices, and countries differ in their commitment to a national currency. Their choices are to: maintain a degree of institutional independence with a national currency subject to the vicissitudes of the international economy; join a currency union, as twelve countries of the European Union have done; or contemplate doing the latter while still pursuing the former policy, as Britain and Sweden are currently doing.

Examining the economic costs and benefits of currency union has value in itself and, insofar as policymakers take non-economic costs into account, doing so helps identify costs they are prepared to accept in order to achieve political objectives. Questions of policy competence have become more complex, however, since Mundell's seminal article of 1961. Krugman provides a simple framework for relating trade integration to currency area membership. Collectively, articles in this issue of the Journal of Public Policy support the conclusion that can also be drawn from reviewing the economic literature on currency union: the costs and benefits of currency union are contingent on many circumstances with the likelihood of contextual and temporal effects.

The paper examines the range of currency and exchange rate regimes choices facing small countries living next to large currency blocs, such as the euro area and the United States. It draws on Canada's successful experience in the 1990s with a flexible exchange rate and explicit inflation targets to argue that such a monetary rule may be the appropriate policy alternative for small countries in this situation such as the United Kingdom or Norway, that are unwilling to surrender their national currency or their monetary independence for economic or political reasons. Because the Canadian economy is more dependent on the production of natural resource products than the economy of its major trading partner, the United States, Canada's flexible exchange rate plays a valuable role in helping to stabilise the Canadian economy in the face of global shocks to natural resource prices.

The monetary implications arising from EMU for Swiss monetary policy show up primarily in the exchange rate. As of yet, fluctuations in the Swiss franc against the euro have been surprisingly moderate. The Swiss franc has thus tracked the euro's decline against the US dollar without experiencing strong inflationary pressures and a convergence in the interest-rate differential: a paradoxical result for a small open economy. This paper examines critically whether the recent record reveals information about a change in SNB monetary policy. It also attempts to shed light on the SNB's ability to implement an independent monetary policy with the new landscape defined by EMU. Four hypotheses of euro tracking are considered.

This paper seeks to explain why Finland, which is further from the main population and productive centres of Europe and arguably more different and more prone to asymmetric shocks than some countries that have chosen to stay out of Stage 3 of EMU, chose to participate. We argue that economically relatively marginal issues affected the choice. How the decision-making process is conducted can be as important as the balance of information on which the decision is based. We also use evidence after the event on how the economy reacts to show that some of the problems hypothesised beforehand have turned out rather more favourably than expected. In particular Finland has experienced a substantial positive asymmetric shock in the ICT sector where membership of EMU has had a very clear positive effect on the impact on the economy. Lastly we offer some limited evidence that membership of EMU itself forces some of the changes to institutions and behaviour that are required to cope with the new pressures.

Inflation targeting is the monetary strategy of all EU member states; whether in the euro area, the two euro-outs, Sweden and the United Kingdom. The latter are now faced with two alternatives to achieve price stability: either remain outside the euro area or join it as full-fledged members. This paper examines this policy choice starting from the views of Knut Wicksell, who considered it in his 1920s analysis of an international monetary system based on price level targeting. Price stability could be achieved either within every country by maintaining flexible exchange rates or jointly on a global scale through a system of fixed exchange rates, that is through a monetary union. To him this was a choice between two ‘evils’: fluctuating price levels in the member states of a global monetary union while the average price level is maintained constant versus fluctuating exchange rates in the absence of a monetary union. To Wicksell, the choice of the proper route towards price stability was less complicated than today because he analysed it solely in monetary terms. The current choice for Sweden and the United Kingdom involves other crucial dimensions, such as the existence of nominal rigidities, and the politics of domestically issued money. Political aspects concerning the euro will be the ultimate determinants of the future monetary path for both countries.

The euro is relevant for decisions that the Polish Central Bank takes about its general rules of monetary policy, goals and decision structures, but it is not, or at least not yet, relevant to the everyday processes of controlling money supply and interest rates. Fighting inflation was a primary target of the central bank prior to applying for entry to the European Union and maintaining a satisfactory external account. However, with the growing openness of the economy, eclectic monetary policy showed a high degree of internal inconsistency. With greater autonomy under a new constitution, the Central Bank adopted direct inflation targeting. The adoption of this measure is consistent with emerging EU policy but was driven by specifically Polish concerns.

The choice facing British government about maintaining the status quo for sterling or joining the euro is a choice between long-term policy regimes. Short-term considerations such as the relative position of business cycles or the current level of the sterling-euro exchange rate have a bearing on the adjustment costs and the timing of entry. The article therefore examines the EMU framework versus the British framework for monetary policy; the performance of economic policy in Britain and in Euroland, and especially Germany as Euroland's main precursor; the relevance to the adjustment costs of membership to the Maastricht criteria and the Chancellor of the Exchequer's five economic tests for joining the euro; and whether or not Britain can qualify for joining EMU. The analysis is broadened to include supporting policies for monetary policy, especially fiscal, labour market and other structural policies where relevant.

Although European Monetary Union led to the creation of one of the world's most independent central banks, politics has not been removed from monetary integration. The European Central Bank's primary claim to legitimacy rests with its ability to deliver low inflation and presumably higher growth. Its independence may be insufficient for this task, making its relationship with political institutions like the Euro-12 and European Parliament more important over time in order to augment its own credibility. This article argues that a model of collective responsibility is more appropriate than one of principle-agent theory to describe the development of European monetary relations between the various institutions as they will need to rely on one another if a coherent European monetary policy is to take shape.

Even though a central bank has formal independence, the success of its actions are part of an interdependent system of policies in which elected governments have a role too. In the making of monetary policy, economists have technical expertise but politicians claim electoral legitimacy. This paper examines monetary policy from the perspective of elected officeholders who must balance non-economic pressures, both domestic and international, against concerns of central bankers with monetary constraint. It emphasizes divisions within national governments about how that balance should be struck, and differences in political priorities for economic policymaking between countries and across time. It concludes with a POP (Politically Optimal Policy), having flexibility between multiple and shifting policy goals rather than fixing on a single target, monetary or non-monetary.