DP326 The Cost of Disinflation and the European Monetary System

Author(s):	Paul De Grauwe
Publication Date:	July 1989
Keyword(s):	EMS, Europe, European Monetary System, Inflation
JEL(s):	134, 431, 432
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=326

In this paper we present empirical evidence indicating that the EMS countries have experienced a worsening of their inflation/unemployment trade-off since 1979 which on average was more pronounced than in the rest of the OECD area (including the other European countries). We interpret this evidence as follows: the EMS forced its high-inflation members to follow gradual disinflationary policies. As a result, the authorities of these countries gained reputation only slowly compared with countries which applied a shock therapy (UK, US). This also forced them to apply deflationary policies longer than if they had used a shock therap.