Gaining Policy Credibility for a Disinflation: Ireland's Experience in the EMS

Jeroen J. M. Kremers
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Jeroen J. M. Kremers: International Monetary Fund

IMF Staff Papers, 1990, vol. 37, issue 1, 116-145

Abstract: Given a need for disinflation, the adoption of a (semi-)fixed exchange rate policy vis-Ã -vis a low-inflation country may provide a source of discipline, enhancing the disinflation's credibility and reducing its detrimental impact on the economy. This paper presents empirical evidence that inflation expectations in Ireland were moderated by entry into the exchange rate mechanism of the EMS, indicating that Ireland's disinflation was successful in deriving credibility from the exchange rate policy. A loss of competitiveness at an early stage of the disinflation appears to have been important in establishing its credibility.

Date: 1990
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