|
It is often claimed that the `rules of the game' of international policy coordination are quite similar between the post-1985 `G-3 Plaza-Louvre intervention accords' and the `EMS as a D-Mark zone'. In Discussion Paper No. 1038, Research Fellow Axel Weber conducts an empirical evaluation of this proposition. The most important issue discussed in the paper is whether the G-3 and EMS countries have primarily relied on policy coordination and convergence or on central bank intervention to stabilize exchange rates, and whether such intervention has been sterilized, coordinated and effective. The G-3 countries have relied primarily on coordinated intervention without any significant commitment to other forms of policy coordination in stabilizing exchange rates. The EMS countries, on the other hand, have at least to some extent resorted to short-term interest rate policy coordination in addition to coordinated intervention. The study confirms the result reported previously in the literature that sterilized intervention, whether coordinated or not, has had no lasting exchange rate effects. The main difference between the EMS and the G-3 system is found to lie in the degree to which policy coordination other than intervention has been implemented. Long-term or even short-term policy coordination is virtually absent in the G-3, while for the EMS, there exists strong evidence of short-term policy coordination, in particular with respect to interest rate policies. Weber argues that the main problem with managed exchange rate systems is that they allow each participating central bank to choose its particular trade-off between monetary autonomy and exchange rate fixity in a discretionary manner. The key to successful exchange rate targeting lies in international policy coordination alone, which needs to be re-enforced in the EMS. The transition to EMU should therefore strengthen the policy coordination and consultation process within the EMS. Foreign Exchange Intervention and International Policy Coordination: Comparing the G-3 and EMS Experience Axel A Weber Discussion Paper No. 1038, October 1994 (IM) |
|