Price Discipline, Output Costs and Exchange Rate Stabilisation: Empirical Estimates for the G3 Countries

Andrew Hughes Hallett

Scottish Journal of Political Economy, 1991, vol. 38, issue 4, 305-16

Abstract: Policy makers believe that exchange rate stabilization would induce greater price discipline for the participants. Economic analysis suggests some loss of output would also be incurred. This paper supplies some estimates of the net benefits by examining how the output-inflation trade-off varies as a function of the degree of exchange rate stabilization, for each of the G3 economies. It appears that exchange rate stabilization may give (Pareto) superior results for output and inflation, compared to a free float, but that outcome is the exception rather than the rule because the advantages of greater exchange rate stability are usually offset by greater monetary instability. Coordination as well as exchange rate stabilization is needed to secure price discipline without output losses. Copyright 1991 by Scottish Economic Society.

Date: 1991
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Scottish Journal of Political Economy is currently edited by Tim Barmby, Andrew Hughes-Hallett and Campbell Leith

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