The Italian Lira in the Narrow Erm Band: The Challenge of Credibility

Author/Editor:

Lazaros E. Molho

Publication Date:

February 1, 1991

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Under free capital mobility, a high-inflation country pursuing a nonaccommodating exchange rate policy will have higher real interest rates than its lower-inflation trading partners as long as that policy is not credible. If the policy gains credibility prior to inflation convergence, the sign of the real interest rate differential may be reversed. Developments in interest rate differentials and capital and reserve flows suggest that Italy’s nonaccommodating exchange rate policy has become significantly more credible in 1989-90. As improved credibility further limits their monetary autonomy, the Italian authorities will have to rely more on fiscal and incomes policies to promote disinflation.

Series:

Working Paper No. 1991/019

Subject:

Exchange rate policy Exchange rates Financial services Foreign exchange Inflation Prices Real exchange rates Real interest rates

English

Publication Date:

February 1, 1991

ISBN/ISSN:

9781451843682/1018-5941

Stock No:

WPIEA0191991

Pages:

38

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