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The political economy of the Exchange Rate Mechanism

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  • Patrick Minford

Abstract

The apparent tendency of ERM countries other than Germany to experience high real exchange rates and to subsidize manufacturing is explained by a rational expectations model in which there is optimally asymmetric policy reaction to good and bad times—devaluation in bad, no revaluation in good. The resulting expected depreciation (at all times) causes inflation in normal and good times to be less than expected inflation, raising real wages and the real exchange rate, and creating pressures for subsidy of the traded sector. Copyright Kluwer Academic Publishers 1994

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File URL: http://hdl.handle.net/10.1007/BF01000910
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 5 (1994)
Issue (Month): 3 (July)
Pages: 235-247

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Handle: RePEc:kap:openec:v:5:y:1994:i:3:p:235-247

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

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Keywords: traded goods; devaluation; subsidies; unanticipated inflation; political equilibrium;

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  1. Francesco Giavazzi & Marco Pagano, 1991. "The Advantage of Tying One's Hands: EMS Discipline and Central Bank Credibility," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 303-330 National Bureau of Economic Research, Inc.
  2. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  3. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-90, February.
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Cited by:
  1. Linjouom, Mireille, 2004. "The Costs and Benefits Analysis of CFA Membership: The Choice of an Exchange Rate Regime for the CFA Countries Zone," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  2. Pierre Siklos & Rod Tarajos, 1996. "Fundamentals and devaluation expectations in target zones: Some new evidence from the ERM," Open Economies Review, Springer, vol. 7(1), pages 35-59, January.

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