Working Paper: CEPR ID: DP1466
Authors: Willem H. Suiter; Giancarlo Corsetti; Paolo A. Pesenti
Abstract: Most interpretations of the Exchange Rate Mechanism crisis of 1992/3 ignore the key role played by structural policy spillovers among European countries, and overlook the effects of coordination (or lack thereof) of monetary and exchange rate policies among the countries making up the periphery of the system. This paper provides a simple analytical framework, able to encompass the recent literature on currency crises, while developing it by bringing out the decisive role of the strategic interactions among national policy-makers in a multi-country monetary and exchange rate game. In contrast to an approach that focuses exclusively on country-specific issues, a systemic view is ultimately able to unravel more coherently, and more convincingly, the ?puzzles? of the ERM crisis.
Keywords: monetary policy; coordination; systemic crises; ERM
JEL Codes: F31; F32; F33; F41; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Expansionary monetary policy in a periphery country (E52) | Real interest rates across the system (E43) |
| Real interest rates across the system (E43) | Currency appreciation or depreciation among the periphery countries (F31) |
| Lack of coordination in monetary policies among the periphery countries (E61) | Severity of the ERM crisis (H12) |
| German reunification shock (E65) | Pressures for real exchange rate appreciation in the center (F31) |
| Pressures for real exchange rate appreciation in the center (F31) | Adverse effects on periphery countries unwilling to adjust nominal exchange rates (F31) |
| Perception of the abandonment of the peg as a viable policy option (E65) | Speculative attacks (D84) |
| Absence of effective policy coordination among the periphery countries (F42) | Larger devaluations than under cooperative arrangements (F31) |