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Credibility and Interest Rate Discretion in the ERM

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  • Hali Edison

    ()

  • Ronald MacDonald

    ()

Abstract

Recent proposals for reforming the international monetary system often focus on a target zone arrangement for the dollar, euro and yen. Theoretical research suggests that a credible target zone confers on a participant some short-run discretion in the setting of interest rates, and recent empirical research suggests that this was indeed the case for the Classical gold standard, perhaps the best example of a credible target zone. In this paper we examine the extent of short-run interest rate discretion (SRID) conferred by another experiment with target zones, namely the ERM experience. Amongst our findings is the result that countries that had a credible commitment to the ERM did indeed have SRID. Copyright Kluwer Academic Publishers 2003

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File URL: http://hdl.handle.net/10.1023/A:1025388009519
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 14 (2003)
Issue (Month): 4 (October)
Pages: 351-368

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Handle: RePEc:kap:openec:v:14:y:2003:i:4:p:351-368

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: exchange rate mechanism; credibility; interest rate linkages; cointegration;

References

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  1. Edison, Hali J. & Fisher, Eric O'N, 1991. "A long-run view of the European monetary system," Journal of International Money and Finance, Elsevier, vol. 10(1), pages 53-70, March.
  2. De Grauwe, Paul, 1989. "Is the European Monetary System a DM-Zone?," CEPR Discussion Papers 297, C.E.P.R. Discussion Papers.
  3. Mali J. Edison & Linda S. Kole, 1995. "European monetary arrangements: Implications for the dollar, exchange rate variability and credibility," European Financial Management, European Financial Management Association, vol. 1(1), pages 61-86.
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Cited by:
  1. J. James Reade & Ulrich Volz, 2009. "Too Much to Lose, or More to Gain? Should Sweden Join the Euro?," Economics Series Working Papers 442, University of Oxford, Department of Economics.
  2. J. James Reade & Ulrich Volz, 2009. "Leader of the Pack? German Monetary Dominance in Europe Prior to EMU," Economics Series Working Papers 419, University of Oxford, Department of Economics.

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