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Pegs, Baskets, and the Importance of Policy Credibility: Lessons of the 1992-93 ERM Crisis

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  • Volz, Ulrich

Abstract

This paper argues that, in contrast to the popular bipolar view on exchange rate choices, intermediate regimes in general and regional exchange rate systems such as the European Monetary System (EMS) in particular should not be ruled out per se even in today?s world of highly mobile capital. The paper highlights that the 1992/93 crisis of the EMS? Exchange Rate Mechanism was a crisis of an exchange rate system and not just the collapse of unilateral pegs pursued by individual countries. Based on an assessment of credibility of the EMS before and during the crisis, the paper discusses distinct features that add to the credibility of regional exchange rate systems. It reasons that a system that is built around well-defined rules, and which is managed very carefully and co-operatively according to those rules, could be both credible and sustainable even in the 21st century. --

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Bibliographic Info

Paper provided by Hamburg Institute of International Economics (HWWA) in its series HWWA Discussion Papers with number 323.

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Date of creation: 2005
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Handle: RePEc:zbw:hwwadp:26238

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Keywords: exchange rate regimes; regional monetary systems; EMS crisis; policy credibility;

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  1. Svensson, Lars E O, 1991. "The Simplest Test of Target Zone Credibility," CEPR Discussion Papers 493, C.E.P.R. Discussion Papers.
  2. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
  3. 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.
  4. Carsten Hefeker & Andreas Nabor, 2005. "China's role in East-Asian monetary integration," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(2), pages 157-166.
  5. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
  6. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  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.
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