Working Paper: CEPR ID: DP598
Authors: Michael J. Artis; Paul Ormerod
Abstract: It is claimed that membership of the exchange rate mechanism (ERM) of the European Monetary System (EMS) gives countries a credibility bonus which reduces the output and employment costs of disinflation. Within the EMS this arises because of the commitment of participants in the ERM to maintain their parities against the Deutschmark, with Germany acting as a low-inflation anchor. The paper finds evidence of such a credibility effect: during `the EMS period' (flexibly dated) German inflation enters into autoregressive inflation predictor schemes for each of the main EMS countries (Belgium, France, Germany, Italy, and the Netherlands). In addition, the process of wage determination in these countries appears to have been affected by institutional changes associated with adjustment to the ERM. Nevertheless, there is also a large residual (upward) adjustment of unemployment.
Keywords: inflation; European Monetary System
JEL Codes: C33; E31; J30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Membership in the EMS (I19) | inflation expectations (E31) |
| Membership in the EMS (I19) | wage determination processes (J38) |
| German inflation (N14) | inflation expectations in EMS countries (F36) |
| German inflation (N14) | wage determination processes in EMS countries (J38) |
| Membership in the EMS (I19) | rising unemployment (J64) |