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Fixed Exchange Rates As a Means to Price Stability: What Have we Learned?

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  • Svensson, L.E.O.

Abstract

This paper discusses what we have learned from last year's currency crises in the ERM and Nordic countries about fixed exchange rates as a means to achieve price stability. After discussing the explanations for the crises, the paper concludes that fixed exchange rates are not a short cut to price stability. Monetary stability and credibility have to be built at home and cannot easily be imported from abroad. Fixed exchange rates are more fragile and difficult to maintain than previously thought. They may even be in conflict with price stability, by inducing a procyclical destabilizing monetary policy, and by inducing an inflation bias. Building monetary credibility is even more important with flexible exchange rates.

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Bibliographic Info

Paper provided by Stockholm - International Economic Studies in its series Papers with number 553.

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Length: 22 pages
Date of creation: 1993
Date of revision:
Handle: RePEc:fth:stocin:553

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Keywords: monetary policy ; exchange rate;

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References

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  1. Giavazzi, Francesco & Spaventa, Luigi, 1990. "The `New' EMS," CEPR Discussion Papers 369, C.E.P.R. Discussion Papers.
    • Francesco Giavazzi & Luigi Spaventa, 1990. "The "New" EMS," Working Papers 86, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Robert P. Flood & Peter M. Garber, 1980. "Gold Monetization and Gold Discipline," NBER Working Papers 0544, National Bureau of Economic Research, Inc.
  3. Ben Bernanke & Frederic Mishkin, 1992. "Central Bank Behavior and the Strategy of Monetary Policy: Observations From Six Industrialized Countries," NBER Working Papers 4082, National Bureau of Economic Research, Inc.
  4. Miller, M & Sutherland, A, 1990. "The 'Walters Critique' of the EMS - A Case of Inconsistent Expectations," The Warwick Economics Research Paper Series (TWERPS) 363, University of Warwick, Department of Economics.
  5. Jeffrey Frankel & Steven Phillips, 1991. "The European Monetary System: Credible at Last?," NBER Working Papers 3819, National Bureau of Economic Research, Inc.
  6. Richard Portes, 1993. "EMS and EMU After the Fall," The World Economy, Wiley Blackwell, vol. 16(1), pages 1-15, 01.
  7. Barry Eichengreen & Charles Wyplosz, 1993. "The Unstable EMS," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 51-144.
  8. Rose, Andrew K. & Svensson, Lars E. O., 1994. "European exchange rate credibility before the fall," European Economic Review, Elsevier, vol. 38(6), pages 1185-1216, June.
  9. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March.
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