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Inflation and the E M S

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  • Susan M. Collins
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    Abstract

    Since the European Monetary System was instituted in March 1979, there has been a dramatic reduction in the inflation rates of member countries This development is widely attributed to the EMS itself. The purpose of this paper is to argue that the theoretical and empirical basis for such a claim is far from conclusive. On the theoretical side, the paper develops a model which highlights two issues. First, changes in the "rules" of the exchange rate system need not coincide with changes in expectations about Central Bank behavior. In fact, I expectations in France do not seem to have changed until policy makers "got tough" in 1982-83. Second, different researchers have made quite different I assumptions about exactly what "rules" the EMS imposes. The paper shows that how the system works matters in terns of the effect joining will have on inflation. On the empirical side, the paper shows that effects which have been attributed to the EMS are in large part due to the global deflation since 1979 and to the fact that EMS members had relatively low inflation before 1979. However, even these estimates should be interpreted with caution. They are very sensitive to time period and to which non EMS countries are included in the sample.

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    File URL: http://www.nber.org/papers/w2599.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2599.

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    Date of creation: May 1988
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    Publication status: published as The European Monetary System Cambride, Cambridge University Press, 1988
    Handle: RePEc:nbr:nberwo:2599

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    1. Kenneth S. Rogoff, 1984. "Can exchange rate predictability be achieved without monetary convergence? : evidence from the EMS," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 245, Board of Governors of the Federal Reserve System (U.S.).
    2. Melitz, Jacques, 1985. "The welfare case for the European Monetary System," Journal of International Money and Finance, Elsevier, Elsevier, vol. 4(4), pages 485-506, December.
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    Cited by:
    1. Paul Grauwe, 1990. "The cost of disinflation and the European Monetary System," Open Economies Review, Springer, Springer, vol. 1(2), pages 147-173, June.

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