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The Unstable EMS

Author

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  • Wyplosz, Charles
  • Eichengreen, Barry

Abstract

This paper undertakes a systematic study of the exchange rate crisis which led to a partial dismembering of the EMS in the Fall of 1992. A review of possible interpretations of the crisis concludes that the EMS is now fundamentally unstable, partly because exchange controls have been banned by the Single Act and partly because the Maastricht Treaty creates perverse incentives for self-fulfilling attacks. A review of possible options suggests that `business as usual' is not viable. We conclude that some restrictions on short-term capital movements, such as requiring all institutions taking open positions in foreign exchange to make non-interest-bearing deposits with their central bank, represent the best option for successfully traversing the treacherous Stage II.

Suggested Citation

  • Wyplosz, Charles & Eichengreen, Barry, 1993. "The Unstable EMS," CEPR Discussion Papers 817, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:817
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    Keywords

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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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