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Simple tests of target zones : the Irish case

Author

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  • Jenny Hughes
  • Margaret J. Hurley

Abstract

In a small open economy with fixed exchange rates, tandard theory suggests that domestic inflation and interest rates should equal those abroad. In a credible target zone, the same theories suggest that inflation and interest rates should be 'close'. Here, we seek to make precise this idea of limits on inflation and interest rate differentials consistent with limits on exchange rate movements. We then examine the case of Ireland, which joined the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS) in 1979 attracted by the prospects of lower, German influenced, inflation and interest rates. We find in the early years of the ERM, both Irish inflation and interest rastes were inconsistent with credibility of the exchange rate regime; in he latter years, from 1987 on, rates were in the derived range around German rates.

Suggested Citation

  • Jenny Hughes & Margaret J. Hurley, 1993. "Simple tests of target zones : the Irish case," Working Papers 199304, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:wpaper:199304
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    File URL: http://hdl.handle.net/10197/1708
    File Function: First version, 1993
    Download Restriction: no
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    Cited by:

    1. Honohan, Patrick & Conroy, Charles, 1994. "Irish Interest Rate Fluctuations in The European Monetary System," Research Series, Economic and Social Research Institute (ESRI), number GRS165.

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