Credibility and Interest Rate Discretion in the ERM

Hali Edison () and Ronald MacDonald

Open Economies Review, 2003, vol. 14, issue 4, 368 pages

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

Keywords: exchange rate mechanism; credibility; interest rate linkages; cointegration (search for similar items in EconPapers)
Date: 2003
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DOI: 10.1023/A:1025388009519

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