The Italian Lira in the Narrow Erm Band: The Challenge of Credibility

Lazaros Molho

No 1991/019, IMF Working Papers from International Monetary Fund

Abstract: Under free capital mobility, a high-inflation country pursuing a nonaccommodating exchange rate policy will have higher real interest rates than its lower-inflation trading partners as long as that policy is not credible. If the policy gains credibility prior to inflation convergence, the sign of the real interest rate differential may be reversed. Developments in interest rate differentials and capital and reserve flows suggest that Italy’s nonaccommodating exchange rate policy has become significantly more credible in 1989-90. As improved credibility further limits their monetary autonomy, the Italian authorities will have to rely more on fiscal and incomes policies to promote disinflation.

Keywords: WP; exchange rate; deutsche mark; rate of exchange rate depreciation; nonaccommodating exchange rate policy; inflation differential; Italy exchange rate; high-inflation country; Italian lira; rate of inflation; real interest rate differential; Italy inflation; In Italy; ex pose; Exchange rate policy; Real interest rates; Inflation; Exchange rates; Real exchange rates (search for similar items in EconPapers)
Pages: 38
Date: 1991-02-01
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