Flexible exchange rates

The ECB targets interest rates rather than exchange rates and in general does not intervene on the foreign exchange rate markets, because of the implications of the Mundell-Fleming Model which suggest that a central bank cannot maintain interest rate and exchange rate targets simultaneously because increasing the money supply results in a depreciation of the currency. In the years following the Single European Act, the EU has liberalised its capital markets, and as the ECB has chosen monetary autonomy, the exchange rate regime of the euro is flexible, or floating.