Working Paper: CEPR ID: DP97
Authors: Jacques Melitz
Abstract: The depreciation of the dollar can lead to conflict within the European Monetary System. In order to develop this theme, I assume that the preferences of German policy-makers are more strongly anti-inflationary than those of the French. This means that the depreciation of the dollar will suit the Germans better than the French. Consequently, a dilemma can arise, wherein no possible realignment can resolve the conflict between France and Germany. Only a return to the conditions of the "snake" will do. That is, France may need to accept a situation where it bears exclusive responsibility for defending the jointly determined parity. But it may not be in the interests of the French nor even, possibly, those of the Germans for France to do so.
Keywords: European Monetary System; Depreciation of the Dollar; Policy Conflict
JEL Codes: 026; 423
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Depreciation of the dollar (F31) | Conflict within the EMS (D74) |
| Depreciation of the dollar (F31) | Differing policy responses (E65) |
| Depreciation of the dollar (F31) | Inflationary pressures (E31) |
| Differing inflationary preferences between Germany and France (E31) | Conflict within the EMS (D74) |
| Depreciation of the dollar (F31) | Potential instability within the EMS (H12) |
| Potential instability within the EMS (H12) | Potential exit from the system (J63) |