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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Monetary policy independence in the ERM: was there any?
Hali J. Edison
Ronald MacDonald
Abstract

Recently proposals for introducing greater exchange rate fixity into the behavior of key exchange rates have become fashionable. One proposal, for example, suggests that a target zone arrangement for the dollar, mark and yen would represent a desirable reform of the international monetary system. The question we seek to address in this paper is how much monetary independence is likely to be conferred on a country participating in such an arrangement. Recent research for the Classical gold standard has suggested that even with a rigidly fixed exchange rate system there is still some scope for monetary independence. Here we examine the extent of monetary independence conferred by a target zone using data from the recent ERM experience. Amongst our findings is the result that countries which had a credible commitment to the target zone had more independence in the operation of their monetary policy than countries with a lesser commitment. It turns out that the monetary independence for a credible participant in a target zone arrangement is longer than that conferred by participation in a regime of rigidly fixed exchange rates, such as the Classical gold standard.


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Hali J. Edison & Ronald MacDonald, Monetary policy independence in the ERM: was there any?, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 665, 2000.
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Keywords: Foreign exchange ; International finance
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