Monetary Policy Interaction within the EMS

International Monetary Fund

No 1989/008, IMF Working Papers from International Monetary Fund

Abstract: A simple two-country stochastic model is used to analyze monetary policy interaction in a system of exchange rate bands such as the EMS, in the context of internationally-integrated financial markets. We consider the widely-acknowledged asymmetry of the system, as it pertains to member countries’ use of monetary policy to offset shocks that impinge on their national incomes. Our results suggest, among other things, that tightening the exchange-rate bands would lead to more intervention by all members, even if formal responsibility for keeping exchange rates within the bands lay only with the peripheral countries.

Keywords: WP; exchange rate; feedback parameter; exchange-rate band; feedback response; policy rule; Policy coordination; reaction curve; optimization problem; vis-à-vis rest; world demand shocks; policy autonomy; stabilization policy; EMS country; Exchange rates; Personal income; Monetary base; Demand for money; Supply shocks; Global; Europe (search for similar items in EconPapers)
Pages: 40
Date: 1989-01-01
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