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Credibility and Interest Rate Discretion in the ERM

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  • Hali Edison
  • Ronald MacDonald

Abstract

Recent proposals for reforming the international monetary system often focus on a target zone arrangement for the dollar, euro and yen. Theoretical research suggests that a credible target zone confers on a participant some short-run discretion in the setting of interest rates, and recent empirical research suggests that this was indeed the case for the Classical gold standard, perhaps the best example of a credible target zone. In this paper we examine the extent of short-run interest rate discretion (SRID) conferred by another experiment with target zones, namely the ERM experience. Amongst our findings is the result that countries that had a credible commitment to the ERM did indeed have SRID. Copyright Kluwer Academic Publishers 2003

Suggested Citation

  • Hali Edison & Ronald MacDonald, 2003. "Credibility and Interest Rate Discretion in the ERM," Open Economies Review, Springer, vol. 14(4), pages 351-368, October.
    • Handle: RePEc:kap:openec:v:14:y:2003:i:4:p:351-368
    DOI: 10.1023/A:1025388009519
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    References listed on IDEAS

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    1. Edison, Hali J. & Fisher, Eric O'N, 1991. "A long-run view of the European monetary system," Journal of International Money and Finance, Elsevier, vol. 10(1), pages 53-70, March.
    2. Mali J. Edison & Linda S. Kole, 1995. "European monetary arrangements: Implications for the dollar, exchange rate variability and credibility," European Financial Management, European Financial Management Association, vol. 1(1), pages 61-86, March.
    3. De Grauwe, Paul, 1989. "Is the European Monetary System a DM-Zone?," CEPR Discussion Papers 297, C.E.P.R. Discussion Papers.
    4. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    5. Weber, Axel A, 1990. "EMU and Asymmetries and Adjustment Problems in the EMS," CEPR Discussion Papers 448, C.E.P.R. Discussion Papers.
    6. Bayoumi,Tamim & Eichengreen,Barry & Taylor,Mark P. (ed.), 1997. "Modern Perspectives on the Gold Standard," Cambridge Books, Cambridge University Press, number 9780521571692, September.
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    Cited by:

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    3. Reade, J. James & Volz, Ulrich, 2010. "Chinese monetary policy and the dollar peg," Discussion Papers 2010/35, Free University Berlin, School of Business & Economics.
    4. J. James Reade & Ulrich Volz, 2011. "When You Got Nothing, You Got Nothing to Lose – Regional Monetary Integration and Policy Independence," Chapters, in: Ulrich Volz (ed.), Regional Integration, Economic Development and Global Governance, chapter 12, Edward Elgar Publishing.

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