Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- Conference participants
- 1 Introduction
- I THE INTERNATIONAL ENVIRONMENT
- II DISINFLATION, EXTERNAL ADJUSTMENT AND COOPERATION
- 4 The role of the exchange-rate regime in a disinflation: empirical evidence on the European Monetary System
- 5 Inflation and the European Monetary System
- 6 Economic growth and exchange rates in the European Monetary System: their trade effects in a changing external environment
- III EXCHANGE RATES, CAPITAL MOBILITY AND MONETARY COORDINATION
- 7 Exchange rates, interest rates, capital controls and the European Monetary System: assessing the track record
- 8 The stability and sustainability of the European Monetary System with perfect capital markets
- 9 Competitiveness, realignment, and speculation: the role of financial markets
- 10 Interventions, sterilisation and monetary policy in European Monetary System countries, 1979-87
- 11 Monetary policy coordination within the European Monetary System: is there a rule?
- IV THE FUTURE OF THE EUROPEAN MONETARY SYSTEM
- Index
9 - Competitiveness, realignment, and speculation: the role of financial markets
Published online by Cambridge University Press: 12 March 2010
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- Conference participants
- 1 Introduction
- I THE INTERNATIONAL ENVIRONMENT
- II DISINFLATION, EXTERNAL ADJUSTMENT AND COOPERATION
- 4 The role of the exchange-rate regime in a disinflation: empirical evidence on the European Monetary System
- 5 Inflation and the European Monetary System
- 6 Economic growth and exchange rates in the European Monetary System: their trade effects in a changing external environment
- III EXCHANGE RATES, CAPITAL MOBILITY AND MONETARY COORDINATION
- 7 Exchange rates, interest rates, capital controls and the European Monetary System: assessing the track record
- 8 The stability and sustainability of the European Monetary System with perfect capital markets
- 9 Competitiveness, realignment, and speculation: the role of financial markets
- 10 Interventions, sterilisation and monetary policy in European Monetary System countries, 1979-87
- 11 Monetary policy coordination within the European Monetary System: is there a rule?
- IV THE FUTURE OF THE EUROPEAN MONETARY SYSTEM
- Index
Summary
Introduction
Since its inauguration in March 1979, the Exchange-Rate Mechanism (ERM) of the European Monetary System (EMS) has functioned with the aid of frequent currency realignments – to date, more than one per year on average. In the eyes of many observers, the strategy of frequent realignment has allowed the system to survive in spite of the rather divergent macroeconomic policies pursued by the ‘Big Three’ of the EMS, France, Germany, and Italy. An apparently critical element in minimising the financial disruption caused by realignments has been the control over cross-border financial flows maintained by France and Italy. The large onshore-offshore interest differentials that have emerged during currency crises suggest that capital controls have played an important role in insulating the French and Italian financial systems from the full force of speculative capital movements.
Current and planned measures liberalising the external capital accounts of France and Italy call into question the continued viability of a widely-understood EMS policy of periodic realignment. Yet the speculative response of capital flows to expected parity change is an area that has received little attention in the academic literature. The relative neglect of the role parity changes play in balance of payments crises is puzzling: empirically, devaluation fears are a leading – perhaps the leading – factor behind currency flight, just as speculative inflows are often inspired by hopes of revaluation. A further shortcoming of the existing literature is that, for the most part, it stops short of analysing the possible real macroeconomic effects of exchange-rate crises.
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- The European Monetary System , pp. 232 - 251Publisher: Cambridge University PressPrint publication year: 1988
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