Abstract

© 1988 International Monetary Fund

Copyright

© 1988 International Monetary Fund

Library of Congress Cataloging-in-Publication Data

Policy coordination in the European monetary system.

(Occasional paper, ISSN 0251-6365; no. 61)

“September 1988.”

Includes bibliographies.

Contents: pt. 1. The European monetary system / by Manuel Guitián—pt. 2. Monetary coordination within the European monetary system / by Massimo Russo and Giuseppe Tullio.

1. Money—European Economic Community countries. 2. European Monetary System (Organization) I. Tullio, Giuseppe, 1948–II. Guitián, Manuel. European monetary system. 1988. III. Russo, Massimo. Monetary coordination within the European monetary system. IV. Series: Occasional paper (International Monetary Fund); no. 61.

HG925.P64 1988 332.4’5’094 88-8424

ISBN 1-55775-028-9

Price: US$7.50

(US$4.50 university libraries, faculty members, and students)

Address orders to:

External Relations Department, Publication Services

International Monetary Fund, Washington, D.C. 20431

Contents

  • Prefatory Note

  • PART I The European Monetary System: A Balance Between Rules and Discretion

    • Manuel Guitián

  • I. Introduction

    • Criteria for Choice of Monetary and Exchange Regime

    • Necessary Conditions Approach

    • Cost-Benefit Approach

  • III. Early Steps: Rules or Discretion?

    • Early Plans for Monetary Integration

    • The Common Margins Arrangement

  • IV. EMS: Search for a Measure of Balance

    • Main Elements of the System

    • Initial Expectations and Current Prospects

  • V. EMS: Experience and Performance to Date

    • Standards of Measurement

    • Exchange Rate Variability

    • Economic Policy Coordination

    • Convergence of Economic Performance

    • Cohesion Within the System

  • VI. EMS: The Issue of Participation

  • VII. Conclusion

  • Appendix. Statistical Tables and Charts

  • References

  • TABLES

  • Appendix

    • 1. Composition of the ECU

    • 2. EMS Realignments: Percentage Changes in Bilateral Central Rates

    • 3. Variability of Exchange Rates

  • CHARTS

  • Appendix

    • 1. Movement of EMS Currency Exchange Rates Against the ECU

    • 2. Movements of the ECU Against the U.S. Dollar

    • 3. EMS: Position in the Narrow Band

    • 4. EMS: Position in the Wide Band

    • 5. EMS: Narrow Money

    • 6. EMS: Broad Money

    • 7. EMS: Domestic Credit

    • 8. EMS: Central Government Balances

    • 9. EMS: Consumer Prices

    • 10. EMS: GDP Deflators

    • 11. EMS: Short-Term Interest Rates

    • 12. EMS: Long-Term Interest Rates

    • 13. EMS: External Current Accounts

    • 14. EMS: Growth of Real GDP

PART II Monetary Policy Coordination Within the European Monetary System: Is There a Rule?

  • PART II Monetary Policy Coordination Within the European Monetary System: Is There a Rule?

    • Massimo Russo and Giuseppe Tullio

  • I. Introduction

  • II. Lessons from the Gold Standard and Bretton Woods

    • Gold Standard

    • Bretton Woods and the Role of the United States

  • III. Performance of the EMS, 1979–87

    • Convergence of Inflation, Exchange Rates, and Interest Rates and Coordination of Monetary Policy

    • Role of the Federal Republic of Germany, Monetary Targeting, and the Inflation Objective

    • Balance of Payments Adjustment Mechanism

  • IV. Suggested Coordination Rules for Monetary Policy

    • EMS-Wide Money Supply Target

    • Individual Country Domestic Credit Targets

    • Individual Country Nominal Income Targeting

    • A Common Inflation Target and an Individual Country Monetary Rule

  • V. Conclusions

  • Appendices

  • I. Principal Component Analysis of Selected Variables for 17 Industrial Countries

  • II. Stability Analysis of Two-Country Model Under Alternative Monetary Rules and Exchange Rate Regimes*

  • References

  • TABLES

  • Section

  • II.

    • 1. The Inflationary Explosion of International Liquidity

    • 2. Monetary Growth in Domestic Currencies: United States and Ten Industrial Countries, 1961–733.

    • 3. Changes in Domestic Component of Monetary Base and U.S. Balance of Payments

  • III.

    • 4. Convergence in the EMS

    • 5. Principal Component Analysis: Fraction of Cumulative Variance of Monetary Variables Explained by First Principal Component—17 Industrial Countries

    • 6. Principal Component Analysis: Fraction of Cumulative Variance of Monetary Variables Explained by First Principal Component—EMS Countries Participating in ERM

    • 7. U.S. and German Share in World, Industrial Country, and EMS Exports and Imports of Goods

    • 8. Share of U.S. and German GNP in Industrial Country and EMS GDP

    • 9. Federal Republic of Germany: Monetary Targets and Their Implementation

    • 10. Deutsche Mark Interventions in the EMS

    • 11. Federal Republic of Germany: Growth of Money Stocks, Net Domestic Assets, and Prices

  • Appendix

  • I.

    • 12. Principal Component Analysis of Bilateral Exchange Rates, March 1973–February 1979

    • 13. Principal Component Analysis of Bilateral Exchange Rates, March 1979–February 1983

    • 14. Principal Component Analysis of Bilateral Exchange Rates, May 1983–March 1986

    • 15. Principal Component Analysis of Consumer Prices, March 1973–February 1979

    • 16. Principal Component Analysis of Consumer Prices, March 1979–February 1983

    • 17. Principal Component Analysis of Consumer Prices, May 1983–March 1986

    • 18. Principal Component Analysis of Nominal Long-Term Interest Rates, March 1973–February 1979

    • 19. Principal Component Analysis of Nominal Long-Term Interest Rates, March 1979–February 1983

    • 20. Principal Component Analysis of Nominal Long-Term Interest Rates, May 1983–March 1986

The following symbols have been used throughout this paper:

… to indicate that data are not available;

— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

– between years or months (e.g., 1984–85 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

/ between years (e.g., 1985/86) to indicate a crop or fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies betweeen constituent figures and totals are due to rounding.

Notes

*

By Eric de Souza, in collaboration with Giuseppe Tullio.

Prefatory Note

Part I of this Occasional Paper was prepared by Manuel Guitián, who would like to thank, without implicating, Thomas Mayer for his comments on an earlier draft and for his assistance in the preparation of the statistical and graphical materials. The paper was originally prepared for a seminar on “Spain and the European Monetary System,” sponsored by Ministerio de Economía y Hacienda and held in Madrid in December 1987. A Spanish version of the paper has been published in Información Comercial Española (Madrid), Núm. 657 (May 1988), pp. 31–55.

Part II was prepared by Massimo Russo, Director of the Fund’s European Department, and Giuseppe Tullio, a member of the Research Department of the Bank of Italy. When the paper was initially written, the authors were, respectively, Director General, and Economic Adviser, Directorate General for Economic and Financial Affairs, Commission of the European Communities. Appendix II to this paper was written by Eric de Souza in collaboration with Giuseppe Tullio. The authors are indebted to Mr. Nouriel Roubini and to their colleagues in the Commission, the Fund, and the Bank of Italy for their comments. However, the conclusions reached are their own and do not necessarily reflect the views of their previous or current employers. Sara Kane of the External Relations Department edited the papers.