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.