DP96 The Dynamic Stability of the European Monetary System

Author(s): Jacques Melitz, Philippe Michel
Publication Date: March 1986
Keyword(s): Coordinated Policy, Currency Realignment, European Monetary System, Leads And Lags, Stability, Transactions Balances
JEL(s): 430
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=96

The European Monetary System (EMS) has proven to work remarkably well thus far, despite three major realignments. We make an attempt to explain the dynamic stability of the system. This attempt gives a central place to movements in desired transactions balances, or `leads and lags', as they are known. We assume the absence of pure speculation, although we examine this assumed absence after completing our main argument. Two important features of the EMS in our model, apart from leads and lags, are uncertainty of realignment dates and coordinated adjustments in interest rates by the central banks of the member governments.