'Can exchange rate predictability be achieved without monetary convergence?--evidence from the EMS' by Kenneth Rogoff

The author shows that the EMS has contributed to stabilizing the exchange rates of member countries and attributes the stabilization to the implementation of capital controls. However this success becomes a failure as departing from market rules is a source of inefficiency. Therefore the EMS experience should be rejected as a lesson for an extended monetary coordination among countries with large capital markets. We concur broadly with the author's conclusions concerning the variability of exchange rates and interest rates but believe that his rejection of the EMS as a lesson on monetary coordination with a view to stabilizing exchange rates remains a moot point. In particular, the EMS experience has demonstrated that: a) large sterilized foreign exchange interventions in the presence of a risk premium have also contributed to stabilizing exchange rates together with capital controls; and b) this exchange rate arrangement has succeeded in fostering strong incentives towards policy coordination and convergence of inflation rates among some member countries.