Abstract
Dutch monetary policy was until the start of stage three of EMU in January 1999 aimed at maintaining a stable exchange rate of the guilder vis-à-vis the German mark. The ultimate objective was an inflation rate which is in line with the relatively low inflation rate in Germany. A credible exchange rate policy, moreover, lead to a low interest rate differential with Germany through mitigation of uncertainties and consequently a lower risk premium in Dutch interest rates. In this way monetary policy contributed to noninflationary, steady economic growth. Naturally, a well-balanced fiscal policy and modest wage increases were also crucial to achive price stability. In addition to a direct effect, the guilder — Dmark peg also had an indirect influence by means of its disciplinating effect on the government’s behaviour and that of the employers’ organizations and trade unions.
Reprinted from, De Economist, 142 (1), (1994), J.M. Berk and C.C.A. Winder, “Price Movements in the Netherlands and Germany and the guilder — Dmark Peg”, 63–74 .© 1994 with kind permission from Kluwer Academic Publishers.
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Trend-stationarity of the relative price ratio implies cointegration between Dutch and German prices levels, with a cointegrating vector of (1–1).
The moment when the peg between the guilder and the Dmark began to serve as a policy objective grosso modo coincides with that of the establishment of the EMS. As Van der Wal (1991) notes in his general description of the evolution of Dutch exchange rate policy, the shift in policy has been a gradual one. After the realignment of the EMS currencies in September 1979, the confidence aspect of a hard guilder is explicitly mentioned. De facto, however, the guilder-Dmark peg had already been an objective of monetary policy for some time before the establishment of the EMS.
With the establishment of the EMS, the volatility of the deviations from the deterministic path could have changed as well. Graphical inspection, however, does not indicate that this has occurred. In the empirical analysis, it is therefore assumed that the sole effect of the introduction of the EMS was a structural change in the trend coefficient.
The Dutch consumer price index is the ‘prijsindex gezinsconsumptie, reeks werknemers gezinnen met een gezinsinkomen beneden de loongrens van de ziekenfondsverzekering, 1985 = 100’ (cost-of-living index (1985 = 100) for households with an income below the upper limit for compulsory Health Insurance). It is published by the Central Bureau of Statistics in the Statistical Bulletin. For Germany, the consumer price index refers to West Germany only. The series used is the ‘Preisindex (1985 = 100) für die Lebenshaltung aller privaten Haushalte’. It is published by the Statistisches Bundesamt and is obtained from the ‘Monatsberichte der Deutschen Bundesbank’.
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© 2001 Springer Science+Business Media Dordrecht
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Berk, J.M. (2001). Price Movements in the Netherlands and Germany and the Guilder-Dmark Peg. In: The Preparation of Monetary Policy. Financial and Monetary Policy Studies, vol 35. Springer, Boston, MA. https://doi.org/10.1007/978-1-4757-3405-8_6
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DOI: https://doi.org/10.1007/978-1-4757-3405-8_6
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