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

32 Pages Posted: 15 Feb 2006

See all articles by Paul R. Masson

Paul R. Masson

International Monetary Fund (IMF) - Research Department; The Brookings Institution

Date Written: December 1994

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.

Keywords: EMS, monetary policy, exchange rates

JEL Classification: E43, F31, F33

Suggested Citation

Masson, Paul R., The Credibility of the United Kingdom's Commitment to the Erm: Intentions Versus Actions (December 1994). Available at SSRN: https://ssrn.com/abstract=883906 or http://dx.doi.org/10.2139/ssrn.883906

Paul R. Masson (Contact Author)

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