Research Fellows Michael Artis and Mark Taylor analyse whether the EMS has conferred greater exchange rate stability on its member currencies. Their analysis suggests that the EMS has reduced the volatility of both exchange and interest rates. This allays fears that the dampening of exchange rate fluctuations might have led only to more interest rate volatility. The authors attribute reduced volatility to the enhanced credibility of members' policies, though capital controls may also have made an important contribution. But evidence of imperfect substitutability among member currencies and of persistent misalignment within the EMS implies that its longer-run sustainability may be in doubt. This Bulletin features a report of a lunchtime meeting by Mark Taylor, at which he discussed these results more fully.

Exchange Rates and the EMS: Assessing the Track Record
M J Artis and Mark P Taylor

Discussion Paper No. 250, April 1988 (IM)