Discussion Paper Details

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Title: The `New' EMS

Author(s): Francesco Giavazzi and Luigi Spaventa

Publication Date: January 1990

Keyword(s): Capital Controls, Economic And Monetary Union and European Monetary System

Programme Area(s): International Macroeconomics

Abstract: This paper attempts to provide an interpretation of recent developments in the EMS. The System has evolved from a regime of adjustable, frequently adjusted parities, where capital controls provided a shelter to weaker currencies, to one where this shelter is being removed, in advance of Stage two of the Delors proposals. An understanding seems to have been reached that exchange rate realignments would be made only in exceptional circumstances. The paper sheds some light on the reasons why financial liberalization seems to have strengthened, rather than weakened the EMS, but it also explains why many in Europe today argue that the EMS with fixed exchange rates and free capital mobility may be unstable. Our findings are at odds with the expected consequences of a shift to more fixed exchange rates when inflation differentials persist and there are no capital controls.

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Bibliographic Reference

Giavazzi, F and Spaventa, L. 1990. 'The `New' EMS'. London, Centre for Economic Policy Research.