DP872 Fixed Exchange Rates as a Means to Price Stability: What Have We Learned?

Author(s): Lars E.O. Svensson
Publication Date: January 1994
Keyword(s): ERM, Fixed Exchange Rates, Price Stability
JEL(s): F31, F33, F41, F42
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=872

This paper discusses what we have learned from last year's currency crises in the ERM and Nordic countries about fixed exchange rates as a means to achieve price stability. After discussing the explanations for the crises, the paper concludes that fixed exchange rates are not a short cut to price stability. Monetary stability and credibility have to be built at home and cannot easily be imported from abroad. Fixed exchange rates are more fragile and difficult to maintain than previously thought. They may even be in conflict with price stability, by inducing a procyclical destabilizing monetary policy, and by inducing an inflation bias. Building monetary credibility is even more important with flexible exchange rates.