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Attitudes Towards Inflation and the Viability of Fixed Exchange Rates: Evidence From the EMS

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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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4057.

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Date of creation: Apr 1992
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Publication status: published as Attitudes toward Inflation and the Viability of Fixed Exchange Rates: Evidence from the EMS , Susan M. Collins, Francesco Giavazzi. in A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform , Bordo and Eichengreen. 1993
Handle: RePEc:nbr:nberwo:4057

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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, Elsevier, vol. 28(1-2), pages 93-115.
  2. Michael D. Bordo, 1993. "The Bretton Woods International Monetary System: A Historical Overview," NBER Chapters, National Bureau of Economic Research, Inc, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 3-108 National Bureau of Economic Research, Inc.
  3. Giavazzi,Francesco & Micossi,Stefano & Miller,Marcus (ed.), 1989. "The European Monetary System," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521389051.
  4. Fischer, Stanley & Huizinga, John, 1982. "Inflation, Unemployment, and Public Opinion Polls," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 14(1), pages 1-19, February.
  5. 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.
  6. Alesina, Alberto F & Grilli, Vittorio, 1991. "The European Central Bank: Reshaping Monetary Politics in Europe," CEPR Discussion Papers, C.E.P.R. Discussion Papers 563, C.E.P.R. Discussion Papers.
  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, University of Chicago Press, vol. 85(3), pages 473-91, June.
  8. N. Gregory Mankiw & Jeffrey A. Miron & David N. Weil, 1987. "The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve," NBER Working Papers 2124, National Bureau of Economic Research, Inc.
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Cited by:
  1. Hayo, Bernd & Hefeker, Carsten, 2002. "Reconsidering central bank independence," European Journal of Political Economy, Elsevier, Elsevier, vol. 18(4), pages 653-674, November.
  2. Daniel Gros & Carsten Hefeker, 2002. "One Size Must Fit All: National Divergences in a Monetary Union," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 3(3), pages 247-262, 08.
  3. Bernd Hayo & Carsten Hefeker, 2001. "Do We Really Need Central Bank Independence? A Critical Re- examination," Macroeconomics, EconWPA 0103006, EconWPA.
  4. Alberto Alesina & Vittorio Grilli, 1993. "On the Feasibility of a One or Multi-Speed European Monetary Union," NBER Working Papers 4350, National Bureau of Economic Research, Inc.
  5. 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, Springer, vol. 13(2), pages 111-132, April.

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