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From EMS to EMU

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  • Fratianni, Michele
  • von Hagen, Jürgen
  • Waller, Christopher

Abstract

This paper discusses the strategic choices involved in the transformation of the current EMS into a European Monetary Union. Alternative strategy proposals are evaluated under the criteria of credibility, flexibility, effective institution-building and mitigation of end games. The Delors strategy mistakes exchange rate fixity for credibility, resulting in an overly rigid and unstable strategy. The Hard Ecu provides flexibility, but is unlikely to achieve EMU. We propose a softened EMS - the Two-Tier EMS - as an alternative that meets the four criteria in a more satisfactory way. The second part develops a principal-agent model of the central bank, which embodies an explanation of political business cycles and the credibility problem. We use this model to show that the current draft of the statutes of the European Central Bank does not solve the dilemma of discretion and credibility in a satisfactory way.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 618.

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Date of creation: Jan 1992
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Handle: RePEc:cpr:ceprdp:618

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Related research

Keywords: Central Bank Constitution; EMI; Monetary and Exchange Rate Regimes;

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Cited by:
  1. Bernard Eschweiler & Michael D. Bordo, 1996. "Rules, Discretion, and Central Bank Independence: The German Experience 1880 - 1989," Departmental Working Papers 199402, Rutgers University, Department of Economics.
  2. Hagen, Jürgen von, 2005. "Political Economy of Fiscal Institutions," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 149, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Paesani, Paolo & Strauch, Rolf & Kremer, Manfred, 2006. "Public debt and long-term interest rates: the case of Germany, Italy and the USA," Working Paper Series 0656, European Central Bank.
  4. Jürgen von Hagen, 2002. "Fiscal Rules, Fiscal Institutions, and Fiscal Performance," The Economic and Social Review, Economic and Social Studies, vol. 33(3), pages 263-284.
  5. Marattin, Luigi & Paesani, Paolo & Salotti, Simone, 2011. "Fiscal shocks, public debt, and long-term interest rate dynamics," Working Papers 14/2011, Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE).

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