Open Economies Review

, Volume 14, Issue 4, pp 351–368 | Cite as

Credibility and Interest Rate Discretion in the ERM

  • Hali Edison
  • Ronald MacDonald
Article

Abstract

Recent proposals for reforming the international monetary system often focus on a target zone arrangement for the dollar, euro and yen. Theoretical research suggests that a credible target zone confers on a participant some short-run discretion in the setting of interest rates, and recent empirical research suggests that this was indeed the case for the Classical gold standard, perhaps the best example of a credible target zone. In this paper we examine the extent of short-run interest rate discretion (SRID) conferred by another experiment with target zones, namely the ERM experience. Amongst our findings is the result that countries that had a credible commitment to the ERM did indeed have SRID.

exchange rate mechanism credibility interest rate linkages cointegration 

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Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  • Hali Edison
    • 1
  • Ronald MacDonald
    • 2
  1. 1.Research DepartmentInternational Monetary FundWashingtonUSA
  2. 2.Department of EconomicsUniversity of StrathclydeGlasgowUK

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