The Credibility of the United Kingdom's Commitment to the Erm: Intentions Versus Actions
December 1, 1994
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Summary
The paper presents estimates of a model of the credibility of the U.K. commitment to its central parity against the deutsche mark during the period of U.K. ERM membership (1990-92). The measure of credibility used is the long-term interest differential with Germany. Credibility is decomposed into two aspects: an assessment of whether the government was truly committed to the ERM, and the probability that even a committed government would be able to continue to bear the unemployment costs. Doubts about the first aspect—which could lead to a self-fulfilling crisis—are shown to have declined steadily during the period of ERM membership, while the second aspect is estimated to have become increasingly important, due to rising unemployment.
Subject: Employment, Exchange rates, Foreign exchange, Inflation, Labor, Prices, Unemployment
Keywords: Employment, EMS, exchange rate, exchange rates, government policy, government's reputation, Inflation, monetary policy, optimising government, statements to the contrary, U.K. government, Unemployment, WP
Pages:
32
Volume:
1994
DOI:
Issue:
147
Series:
Working Paper No. 1994/147
Stock No:
WPIEA1471994
ISBN:
9781451856682
ISSN:
1018-5941
Notes
Presents estimates of a model of the credibility of the U.K. commitment to its central parity against the deutsche mark during the period of U.K. ERM membership (1990-92).
