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The political economy of the Exchange Rate Mechanism

  • Patrick Minford

The apparent tendency of ERM countries other than Germany to experience high real exchange rates and to subsidize manufacturing is explained by a rational expectations model in which there is optimally asymmetric policy reaction to good and bad times—devaluation in bad, no revaluation in good. The resulting expected depreciation (at all times) causes inflation in normal and good times to be less than expected inflation, raising real wages and the real exchange rate, and creating pressures for subsidy of the traded sector. Copyright Kluwer Academic Publishers 1994

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File URL: http://hdl.handle.net/10.1007/BF01000910
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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 5 (1994)
Issue (Month): 3 (July)
Pages: 235-247

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Handle: RePEc:kap:openec:v:5:y:1994:i:3:p:235-247
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  1. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-90, February.
  2. Giavazzi, Francesco & Pagano, Marco, 1988. "The advantage of tying one's hands : EMS discipline and Central Bank credibility," European Economic Review, Elsevier, vol. 32(5), pages 1055-1075, June.
  3. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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