The Unstable EMS

In January 1992, the European monetary system (EMS) celebrated 5 years of exchange rate stability, and the transition to European monetary union (EMU) appeared to be fully under way. By the end of the year, the EMS had endured and was continuing to experience the most severe crisis in its 14-year hi...

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Bibliographic Details
Published in:Brookings papers on economic activity 1993-01, Vol.1993 (1), p.51-143
Main Authors: Eichengreen, Barry, Wyplosz, Charles, Branson, William H., Dornbusch, Rudiger
Format: Article
Language:English
Subjects:
Balance of payments
Central banks
Common markets
Competitiveness
Crisis
Currency
Currency devaluation
Economic models
European Monetary Union
Exchange rates
Foreign exchange rates
Inflation rates
Interest rates
Market equilibrium
Monetary policy
Monetary systems
Monetary unions
Speculative attacks
Stabilization
Studies
Treaties
Unit labor costs
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Summary:In January 1992, the European monetary system (EMS) celebrated 5 years of exchange rate stability, and the transition to European monetary union (EMU) appeared to be fully under way. By the end of the year, the EMS had endured and was continuing to experience the most severe crisis in its 14-year history. Two of 10 currencies, the Italian lira and the British pound, had been driven from the exchange. Other currencies had been devalued involuntarily. What happened is that the protracted negotiation and ratification concerning the EMU allowed doubts to surface about whether the treaty would ever come into effect. This altered the costs and benefits of the policies of austerity required of countries seeking to qualify for the EMU, leading the markets to anticipate that those policies would be abandoned. Branson comments that he agrees with the analysis but disagrees with the recommendation of putting a Tobin tax on foreign exchange transactions. Dornbusch questions their model of self-fulfilling expectations.
ISSN:0007-2303
1533-4465
0007-2303
DOI:10.2307/2534603