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The Credibility of the United Kingdom's Commitment to the Erm; Intentions Versus Actions

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  • Paul R Masson

Abstract

The paper presents estimates of a model of the credibility of the U.K. commitment to its central parity against the deutsche mark during the period of U.K. ERM membership (1990-92). The measure of credibility used is the long-term interest differential with Germany. Credibility is decomposed into two aspects: an assessment of whether the government was truly committed to the ERM, and the probability that even a committed government would be able to continue to bear the unemployment costs. Doubts about the first aspect—which could lead to a self-fulfilling crisis—are shown to have declined steadily during the period of ERM membership, while the second aspect is estimated to have become increasingly important, due to rising unemployment.

Suggested Citation

  • Paul R Masson, 1994. "The Credibility of the United Kingdom's Commitment to the Erm; Intentions Versus Actions," IMF Working Papers 94/147, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:94/147
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    Cited by:

    1. Schor, Armand-Denis, 2000. "La théorie des zones monétaires optimales : l’optimum, le praticable, le crédible et le réel," L'Actualité Economique, Société Canadienne de Science Economique, vol. 76(4), pages 545-576, décembre.

    More about this item

    Keywords

    Exchange rate policy; United Kingdom; EMS; monetary policy; exchange rates; unemployment; probability; equation; employment; equations;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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