Working Paper: CEPR ID: DP649
Authors: Michael J. Artis
Abstract: The conditions of the `new EMS' - an absence of exchange rate realignments and corresponding added credibility - have given rise to concern about the stabilization properties of the System. Nominal interest rate divergence may have been narrowed ahead of inflation divergence. Cross-country real interest rankings would then assume a negative correlation with the corresponding inflation rankings. The paper argues that on theoretical grounds, a perverse correlation between real interest rates and inflation can be predicted for `old EMS' conditions. Empirical evidence supports this prediction while failing to confirm it for the `new EMS'.
Keywords: inflation; real interest rates; European Monetary System
JEL Codes: E52; F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation (E31) | real interest rates (E43) |
| nominal interest rates (E43) | inflation (E31) |
| real interest rates (E43) | inflation (E31) |
| inflation (E31) | nominal interest rates (E43) |