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Attitudes toward Inflation and the Viability of Fixed Exchange Rates: Evidence from the EMS

In: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform

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  • Susan M. Collins
  • Francesco Giavazzi

Abstract

History provides us with many examples of multiple country fixed exchange rate regimes that have eventually fallen apart. In light of these failures, why has the EMS been so successful in stabilizing exchange rates among members, and in expanding its membership? This paper argues that one key aspect of the explanation lies in a convergence in attitudes toward inflation and unemployment among EMS members since the late 1970s. This paper presents new empirical evidence for this convergence using household survey data for eight European countries during 1974-90. We find evidence that initially high inflation countries -- France and Italy -- have experienced a decrease in tolerance for inflation relative to unemployment. Germany and other low inflation countries, in contrast, appear to have experienced a decrease in tolerance for unemployment. The paper also contains a theoretical section that illustrates why shifts in attitudes of voters within a given country might lead that country to join a fixed exchange rate regime.

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This chapter was published in:

  • Michael D. Bordo & Barry Eichengreen, 1993. "A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform," NBER Books, National Bureau of Economic Research, Inc, number bord93-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 6880.

    Handle: RePEc:nbr:nberch:6880

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    References

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    1. Rogoff, Kenneth, 1985. "Can exchange rate predictability be achieved without monetary convergence? : Evidence from the EMS," European Economic Review, Elsevier, vol. 28(1-2), pages 93-115.
    2. Fischer, Stanley & Huizinga, John, 1982. "Inflation, Unemployment, and Public Opinion Polls," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(1), pages 1-19, February.
    3. Michael D. Bordo, 1992. "The Bretton Woods International Monetary System: An Historical Overview," NBER Working Papers 4033, National Bureau of Economic Research, Inc.
    4. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
    5. Alesina, Alberto F & Grilli, Vittorio, 1991. "The European Central Bank: Reshaping Monetary Politics in Europe," CEPR Discussion Papers 563, C.E.P.R. Discussion Papers.
    6. Mankiw, N Gregory & Miron, Jeffrey A & Weil, David N, 1987. "The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve," American Economic Review, American Economic Association, vol. 77(3), pages 358-74, June.
    7. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    8. Giavazzi,Francesco & Micossi,Stefano & Miller,Marcus (ed.), 1989. "The European Monetary System," Cambridge Books, Cambridge University Press, number 9780521389051, October.
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    Cited by:
    1. Bernd Hayo & Carsten Hefeker, 2001. "Do We Really Need Central Bank Independence? A Critical Re- examination," Macroeconomics 0103006, EconWPA.
    2. Daniel Gros & Carsten Hefeker, 2000. "One Size Must Fit All. National Divergences in a Monetary Union," CESifo Working Paper Series 326, CESifo Group Munich.
    3. Alesina, Alberto F & Grilli, Vittorio, 1993. "On the Feasibility of a One- or Multi-Speed European Monetary Union," CEPR Discussion Papers 792, C.E.P.R. Discussion Papers.
    4. Pierre-Guillaume Méon & Jean-Marc Rizzo, 2002. "The Viability of Fixed Exchange Rate Commitments: Does Politics Matter? A Theoretical and Empirical Investigation," Open Economies Review, Springer, vol. 13(2), pages 111-132, April.
    5. Hayo, Bernd & Hefeker, Carsten, 2002. "Reconsidering central bank independence," European Journal of Political Economy, Elsevier, vol. 18(4), pages 653-674, November.

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