EUROPEAN ideal exchange-rate system is one that allows high levels of predictability of relative prices while ensuring smooth adjustment to economic shocks. In a  ell functioning
system, people can trade and invest in other countries without worrying that exchange rates will suddenly change and make their ventures unprofitable. This ideal seemed to be attained-during most of the Bretton Woods era, when exchange-rate changes were infrequent yet output and trade grew rapidly.

In the last decade, however, fixed-exchange-rate systems have more often been sources of instability than stability. Fixed-exchange-rate systems were the subject of intense speculative attack that reached global proportions on three occasions during the 1990s: in Europe in 1991-1992, in Mexico in 1994- 1995, and in East Asia in 1997-1998. In this subsection, we describe some of the pitfalls of fixed exchange- rate systems and chart the evolution of the European Monetary Union .from a fixed-rate system to a common currency.

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