Pegs, Baskets, and the Importance of Policy Credibility: Lessons of the 1992-93 Erm Crisis

28 Pages Posted: 5 Jul 2005

See all articles by Ulrich Volz

Ulrich Volz

University of London - School of Oriental and African Studies (SOAS) - Economics; Deutsches Institut für Entwicklungspolitik (DIE) - German Development Institute (DIE)

Date Written: June 2005

Abstract

This paper argues that, in contrast to the popular bipolar view on exchange rate choices, intermediate regimes in general and regional exchange rate systems such as the European Monetary System (EMS) in particular should not be ruled out per se even in today's world of highly mobile capital. The paper highlights that the 1992/93 crisis of the EMS' Exchange Rate Mechanism was a crisis of an exchange rate system and not just the collapse of unilateral pegs pursued by individual countries. Based on an assessment of credibility of the EMS before and during the crisis, the paper discusses distinct features that add to the credibility of regional exchange rate systems. It reasons that a system that is built around well-defined rules, and which is managed very carefully and co-operatively according to those rules, could be both credible and sustainable even in the 21st century.

Keywords: Exchange rate regimes, regional monetary systems, EMS crisis, policy credibility

JEL Classification: F02, F33, F36, F42

Suggested Citation

Volz, Ulrich, Pegs, Baskets, and the Importance of Policy Credibility: Lessons of the 1992-93 Erm Crisis (June 2005). HWWA Discussion Paper No. 323. Available at SSRN: https://ssrn.com/abstract=756684 or http://dx.doi.org/10.2139/ssrn.756684

Ulrich Volz (Contact Author)

University of London - School of Oriental and African Studies (SOAS) - Economics

London, WC1E 7HU
United Kingdom

Deutsches Institut für Entwicklungspolitik (DIE) - German Development Institute (DIE) ( email )

Tulpenfeld 4
Bonn, 53113
Germany

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