A stroll along the first floor corridor at the International Monetary Fund's Washington headquarters reveals the fundamental and indisputable fact that political considerations, rather than purely economic concerns, are the predominant practical determinants of the domain of operation of currency regimes. Despite the theory of optimum currency areas which might suggest alternative outcomes, with few exceptions, the empirical regularity is one country, one money. Even the exceptions help prove the rule. The common currencies of the African franc zone reflect still strong political, as well as economic, linkage the former colonial power. The use of the U.S. dollar as the circulating medium in Panama (and Liberia) also reflects present or past political relationships. Moreover, the political theory of currency areas is not merely statement of static facts; it has predictive power. The common currency that Rome imposed throughout its empire did not survive the decline and fall of that empire. Similarly, the states that emerged from the breakups of the Austro-Hungarian and Ottoman empires after World War I rapidly moved separate currencies. When the Soviet Union collapsed at the end of 1991, some misguidedly thought that ruble zone could and should be preserved; but reality prevailed, and the 15 sovereign republics of the former Soviet Union all now have independent national currencies. Conversely, when the Founding Fathers sought construct a more perfect in the U.S. Constitution of 1787, the power to coin money and regulate the value thereof was transferred from the states the new federal government. The objective was not only improve the monetary basis for commerce and finance within and between the states, but also thereby strengthen their political union. In Europe today, the drive construct European Monetary Union (EMU) has been justified primarily on the prospective economic benefits of common currency. However, such proposal would have been literally unthinkable, whatever its possible economic benefits, with the political divisions that characterized Europe until relatively recent years. And, still today, the strongest advocates of EMU tend be those who see monetary union not only as beneficial economic mechanism, but also as substantively and symbolically important for strengthening the political dimension of European union. Conversely, those who are skeptical about stronger political union in Europe also tend be skeptical about EMU. In view of the centrality of political considerations in determining monetary arrangements, it seems essential ask how these considerations affect the differences between currency areas and currency unions, most importantly in the effort transform European monetary arrangements from currency area into EMU. A currency area is an arrangement for group of countries peg exchange rates among distinct national currencies. In some cases, exchange rates may be rigidly pegged, but more usually they are allowed fluctuate within narrow bands. Members retain their own central banks, although with serious constraints on the independence of national monetary policies. A currency union involves much stronger political and institutional commitment fix exchange rates absolutely through single money that functions as the monetary standard for group of countries. The supporting institutional structure also includes common monetary authority for all the countries of the union which determines monetary policy on union-wide basis. * Research Department, International Monetary Fund, Washington, DC 20431. The opinions expressed in this paper are solely those of the author and do not reflect the views of the International Monetary Fund.

As has often been observed, support for free trade and opposition to protectionism are the prescriptions for economic policy that are the most broadly, if not universally, shared among professional economists. Indeed, even those few who would argue for interventionist trade policies in selected circumstances would be hard pressed to find a persuasive rationale for most existing trade interventions as enhancing the usual conception of a nation's general economic welfare. For instance, it may be possible to construct a logically tight case for supporting, with subsidies or temporary trade protection, some high-technology industries that are expected to generate positive nonpecuniary externalities within the national economy. The naive might even believe that real-world political processes actually allow most governments to implement consistently such beneficial interventions, without opening the door to a host of more dubious activities. However, surveying the range of actual trade interventions of, for example, the United States, it is difficult to see how import restraints for textiles, steel, or automobiles are allowing dynamic comparative advantage to be developed in these industries; and the same may generally be said for many of the protectionist policies of other nations. It is on such specific issues, would emphasize, rather than on the abstract principle of absolute free trade, that the practical and important battle over freer trade versus increased protectionism is actually won and lost. Thus, as the keynote for this paper, it is fair to ask the following question: if economists have so long and so generally agreed about the virtues of freer trade and the evils of protectionism, why have we not been more effective in persuading others of the merit of our position. As see it, the situation is rather like that faced by a famous preacher who recently called his congregation together to pray for an end to the long California drought. My friends, he said, I want to thank you all for coming here today, when so many others might ridicule our efforts. But, have for you a question. You all know why we are here. What want to know is-where is your confidence? Where is your belief? Where is your faith? Where are your umbrellas? Similarly, as economists imbued with the true faith and preaching the virtues of freer trade, we need to ask: why do we not more consistently inspire other people to take up the intellectual umbrellas that guard against the evils of protectionism? On this question, would first like to offer one important qualification, then consider two relevant answers, and finally conclude with three suggestions.

This model treats the exchange rate as an "asset price" that depends on expectations concerning exogenous real and monetary factors that will affect relative prices and absolute price levels in future periods. Changes in exchange rates reflect both expected changes in these exogenous factors and changes in expectations occasioned by new information. The model explains the random component in exchange rate behavior, the source of divergences from purchasing power parity, the anticipatory response of exchange rates to future expected disturbances, and the causes of exchange rate overshooting.

This paper analyzes the dynamic response to a relative price change in a two sector model when the movement of capital from one sector to another requires the use of economic resources. The adjustment process is analyzed as a problem in investment theory; owners of capital balance the costs of capital movement with the expected future benefits. The expectations of capital owners concerning future rental rates in the two industries are shown to play a critical role in determining the efficiency of the adjustment process. When expectations are "rational," the competitive adjustment path maximizes the present discounted value of the economy's final output. When expectations are not rational, the competitive adjustment past is distorted and diverges from the socially optimal path. The paper also analyzes the implications of different assumptions concerning the technology of the adjustment process, establishing that both the adjustment path of the economy and its ultimate long-run equilibrium depend critically on this element of technology.