Working Paper: CEPR ID: DP245
Authors: Daniel Cohen; Jacques Melitz; Gilles Oudiz
Abstract: What purpose does the European Monetary System serve? Who benefits from it? Is it a Deutschmark zone? Or could one argue that, despite the asymmetrical positions of France and Germany, the System does serve a certain collective interest? An attempt to answer these questions reveals a basic paradox in the System: the operation of the EMS tends to undermine its own raison d'etre. In its present form, the EMS relies on superior monetary discipline in Germany, but this breeds monetary discipline elsewhere and therefore lessens the need of other members to lean on Germany for this advantage. The EMS will therefore need to evolve if it is to remain viable. The lines of possible evolution include a movement towards monetary union. The consequences for fiscal policy are particularly important.
Keywords: European Monetary System; Monetary Discipline; International Cooperation; Inflation Policies
JEL Codes: 431; 432
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| German monetary discipline (E58) | monetary discipline of other EMS members (F36) |
| Bank of France's interventionist approach (F33) | greater volatility (E32) |
| Bundesbank's non-interventionist stance (E58) | stability (C62) |
| more cooperative monetary policy framework (E61) | stabilize the EMS (E63) |