DP480 The `Walters' Critique of the EMS: A Case of Inconsistent Expectations
|Author(s):||Marcus Miller, Alan Sutherland|
|Publication Date:||November 1990|
|Keyword(s):||Credibility, Disinflation, European Monetary System, Stability|
|JEL(s):||134, 431, 432|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=480|
Alan Walters has suggested that the European Monetary System will prove dynamically unstable when capital controls are removed. The argument is analysed within a model that includes overlapping contracts. It is found that the short-run effects predicted by Walters only arise when the credibility of the peg differs as between the labour and financial markets: but even if such a difference exists the system is stable in the long run.