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.