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The European Monetary System (EMS arrangements (:check: Exchange rate…
The European Monetary System
re-engineered ERM
Softer ERM :<3:
EMS-2
new wave
EMS - 1
1st version of EMS(1979-86)
PLAN A
dedicate monetary policies to the exchange pegs
PLAN B :check:
accept lasting divergences in inflation and adjust the exchange rates frequently as needed
this plan was accepted
2nd version of EMS(1979-85)
difficulties
high-inflation countries would see their real exchange rate, appreciate, and, their trade accounts would deteoriate
these countries appeared to be in external deficit
Crisis 1992-93
EMS arrangements
:check: Mutual support
bilateral responsibility
unlimited interventions as long as currencies vis-a-vis
both countries central banks stabilise the exchange rate parity
if ran out of reserves, the second or other ERM central banks give a hand
:check: Exchange rate mechanism's parity grid
± 2.25 per cent around the central mean
± 6 per cent for Italy (due to inflation)
ERM currencies fixed to each other
no dollar/gold reference
fully symmetric
bilateral responsibility
:check: Joint management of exchange rate realignments
:check: ECU