Has the 'franc fort' exchange rate policy affected the inflationary dynamics? Theory and new evidence

Moise Sidiropoulos, Jamel Trabelsi and Costas Karfakis

International Economic Journal, 2005, vol. 19, issue 3, 379-395

Abstract: This paper examines the impact of the 'franc fort' policy implemented in France from 1983 on the inflationary dynamics by means of a square root Kalman filter approach. An interesting aspect of the analysis is the evidence that the 'franc fort' exchange rate policy had a significant impact on the inflationary dynamics in France through its credibility effects. These results confirm the imported credibility hypothesis according to which the French authorities accelerated the disinflation process by importing the German monetary policy credibility through the 'hard peg' of the franc-DM exchange rate. These findings show that inflation dynamics in France began to converge significantly to that in Germany after the implementation of the 'franc fort' policy, making more credible the plan for the final transition to the euro. Moreover, this analysis may also reveal much about the nature of potential success of the current initiative of the new member countries now in the process of joining the EU and looking eventually to adopt the euro.

Keywords: Franc fort; inflationary dynamics; square root Kalman filter (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (4)

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DOI: 10.1080/10168730500199400

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