The Credibility of the United Kingdom's Commitment to the Erm: Intentions Versus Actions

December 1, 1994

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

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:
https://doi.org/10.5089/9781451856682.001
Issue:
147
Series:
Working Paper No. 1994/147
Stock No:
WPIEA1471994
ISBN:
9781451856682
ISSN:
1018-5941

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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).

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