Monetary policy independence in the ERM: was there any?

Recently proposals for introducing greater exchange rate fixity into the behavior of key exchange rates have become fashionable. One proposal, for example, suggests that a target zone arrangement for the dollar, mark and yen would represent a desirable reform of the international monetary system. The question we seek to address in this paper is how much monetary independence is likely to be conferred on a country participating in such an arrangement. Recent research for the Classical gold standard has suggested that even with a rigidly fixed exchange rate system there is still some scope for monetary independence. Here we examine the extent of monetary independence conferred by a target zone using data from the recent ERM experience. Amongst our findings is the result that countries which had a credible commitment to the target zone had more independence in the operation of their monetary policy than countries with a lesser commitment. It turns out that the monetary independence for a credible participant in a target zone arrangement is longer than that conferred by participation in a regime of rigidly fixed exchange rates, such as the Classical gold standard.