Discussion Paper Details

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Title: Counter-Inflationary Policy in the Framework of the EMS

Author(s): Michael J Artis

Publication Date: March 1992

Keyword(s): European Monetary System, Inflation and Real Interest Rates

Programme Area(s): International Macroeconomics

Abstract: The conditions of the `new EMS' - an absence of exchange rate realignments and corresponding added credibility - have given rise to concern about the stabilization properties of the System. Nominal interest rate divergence may have been narrowed ahead of inflation divergence. Cross-country real interest rankings would then assume a negative correlation with the corresponding inflation rankings. The paper argues that on theoretical grounds, a perverse correlation between real interest rates and inflation can be predicted for `old EMS' conditions. Empirical evidence supports this prediction while failing to confirm it for the `new EMS'.

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Bibliographic Reference

Artis, M. 1992. 'Counter-Inflationary Policy in the Framework of the EMS'. London, Centre for Economic Policy Research.