The political economy of the Exchange Rate Mechanism

A. Patrick Minford

Open Economies Review, 1994, vol. 5, issue 3, 235-247

Abstract: The apparent tendency of ERM countries other than Germany to experience high real exchange rates and to subsidize manufacturing is explained by a rational expectations model in which there is optimally asymmetric policy reaction to good and bad times—devaluation in bad, no revaluation in good. The resulting expected depreciation (at all times) causes inflation in normal and good times to be less than expected inflation, raising real wages and the real exchange rate, and creating pressures for subsidy of the traded sector. Copyright Kluwer Academic Publishers 1994

Keywords: traded goods; devaluation; subsidies; unanticipated inflation; political equilibrium (search for similar items in EconPapers)
Date: 1994
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Working Paper: The Political Economy of the Exchange Rate Mechanism (1993)
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DOI: 10.1007/BF01000910

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