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 n… - Rudi Dornbusch

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

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.

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