Copyright
© 1986 International Monetary Fund
Library of Congress Cataloging-in-Publication Data
The European monetary system.
(Occasional paper, ISSN 0251–6365; no. 48)
Prepared by H. Ungerer and others, of the European Department.
Bibliography: p.
1. Money—European Economic Community Countries.
I. Ungerer, Horst. II. International Monetary Fund. European Department. III. Series: Occasional Paper (International Monetary Fund); no. 48. HG930.5.E86863 1986 332.4’5’094 86–21432
ISBN 0-939934-79-5
Price: US$7.50
(US$4.50 university libraries, faculty members, and students)
Address orders to:
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Contents
PREFATORY NOTE
I. Introduction
II. THE SYSTEM AND ITS DEVELOPMENT
Membership in the European Monetary System and Participation in the Exchange Rate Mechanism
Evolution of the System
Changes in the Institutional Setup of the EMS
Future Development of the EMS
III EXCHANGE RATE DEVELOPMENTS
Overview
Exchange Rate Developments in the EMS Since 1983
IV VARIABILITY OF EXCHANGE RATES
Conceptual Considerations
Patterns of Variability
Conclusions
Technical Note: Measuring Exchange Rate Variability
V ECONOMIC CONVERGENCE AMONG EMS MEMBER COUNTRIES
Conceptual Problems
Price Developments
Monetary Developments
Fiscal and External Current Account Developments
Real Sector Developments
Conclusions
APPENDICES
I STATISTICAL TABLES
II LEGAL TEXTS
SELECTIVE BIBLIOGRAPHY
TABLES
Appendix I
1. Quotas and Ceilings Under the Short-Term Monetary Support and Medium-Term Financial Assistance Facilities
2. The Creation of ECUs by Swap Operations, 1979–86
3. Percentage Weights of Member Currencies in the ECU
4. Composition of the ECU
5. EMS: Periods of Strain
6. EMS: Bilateral Central Rates
7. EMS Realignments: Percentage Changes in Bilateral Central Rates
8. ECU Central Rates
9. Interest Differentials for Three-Month Deposits, 1979–86
10. EMS: Economic Measures in Connection with Realignments
11. Indicators of Competitiveness in Manufacturing as Measured by Unit Labor Costs Adjusted for Exchange Rate Changes in Relation to EMS Partner Countries
12. Indicators of Competitiveness in Manufacturing as Measured by Unit Labor Costs Adjusted for Exchange Rate Changes in Relation to 16 Industrial Partner Countries
13. Indicators of Competitiveness as Measured by Consumer Prices Adjusted for Exchange Rate Changes in Relation to EMS Partner Countries
14. Indicators of Competitiveness as Measured by Consumer Prices Adjusted for Exchange Rate Changes in Relation to 16 Industrial Partner Countries
15. Currencies for which Variability Rose from 1974–78 to 1979–85, by Table and Country Group
16. Variability of Bilateral Nominal Exchange Rates Against ERM Currencies, 1974–85
17. Variability of Log Changes of Bilateral Nominal Exchange Rates Against ERM Currencies, 1974–85
18. Variability of Log Changes of Nominal Effective Exchange Rates Against ERM Currencies, 1974–85
19. Variability of Bilateral Real Exchange Rates Against ERM Currencies, 1974–85
20. Variability of Log Changes of Bilateral Real Exchange Rates Against ERM Currencies, 1974–85
21. Variability of Log Changes of Real Effective Exchange Rates Against ERM Currencies, 1974–85
22. Variability of Bilateral Nominal Exchange Rates Against Non-ERM Currencies, 1974–85
23. Variability of Log Changes of Bilateral Nominal Exchange Rates Against Non-ERM Currencies, 1974–85
24. Variability of Log Changes of Nominal Effective Exchange Rates Against Non-ERM Currencies, 1974–85
25. Variability of Bilateral Real Exchange Rates Against Non-ERM Currencies, 1974–85
26. Variability of Log Changes of Bilateral Real Exchange Rates Against Non-ERM Currencies, 1974–85
27. Variability of Real Effective Exchange Rates Against Non-ERM Currencies, 1974–85
28. Variability of Nominal Effective Exchange Rates, 1974–85
29. Variability of Log Changes of Nominal Effective Exchange Rates, 1974–85
30. Variability of Nominal Exchange Rates Against ERM Currencies, 1979–85
31. Consumer Price Indices, 1974–85
32. GDP Deflators, 1974–85
33. Generalized Least Squares Estimates of Inflation Equation for 22 Countries, 1974–84
34. Generalized Least Squares Estimates of Inflation Equation for 22 Countries, 1979–84
35. Generalized Least Squares Estimates of Inflation Equation for Seven ERM Countries, 1974–84
36. Unit Labor Costs, 1974–85
37. Rate of Growth of Narrow Money, 1974–85
38. Rate of Growth of Broad Money, 1974–85
39. Rate of Growth of Domestic Credit, 1974–85
40. Real Narrow Money Stock, 1974–85
41. Real Broad Money Stock, 1974–85
42. Real Domestic Credit, 1974–85
43. Short-Term Interest Rates, 1974–85
44. Long-Term Interest Rates, 1974–85
45. Matrix of Correlation Coefficients Between Short-Term Interest Rates, January 1974–March 1979 and April 1979–September 1985
46. Matrix of Correlation Coefficients Between Long-Term Interest Rates, January 1974–March 1979 and April 1979–September 1985
47. Central Government Budget Balance as a Ratio to GDP, 1974–84
48. Balance of Payments Current Account, 1974–84
49. Real Rates of Growth of Gross Domestic Product, 1974–85
50. Gross Fixed Capital Formation, 1974–85
CHARTS
Section
III
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
V
5. Rates of Inflation in EMS and Selected Other Industrial Countries
6. Growth of Narrow Money in EMS and Other Industrial Countries
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 between constituent figures and totals are due to rounding.
Prefatory Note
This study reviews developments in the European Monetary System from the beginning of 1983 to August 1986; it updates and complements an earlier study prepared by staff members of the International Monetary Fund and published as Occasional Paper No. 19, which covered the time period from the inception of the European Monetary System to the end of 1982.
Like the earlier study, the present study limits itself to a discussion of the evolution of the system and of exchange rate developments and to an analysis of exchange rate variability and economic convergence. The authors are aware that there are other important issues that remain for future work. These include the role of exchange rate policy in fostering domestic economic adjustment, a more detailed analysis of the international competitiveness of EMS countries, and the evolution of the private ECU and its implications for the functioning and further development of the EMS.
Like Occasional Paper No. 19, this paper was prepared in the European Department. The authors benefited from a great number of helpful comments and suggestions made by colleagues in their own and other departments of the International Monetary Fund. Research assistance by Behrouz Guerami of the European Department and editorial help by David Driscoll of the External Relations Department are gratefully acknowledged. The views expressed in this paper represent those of the authors and not necessarily those of the Fund.