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The Quest for Monetary Stability

The Quest for Monetary Stability

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Published by hishamsauk

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Published by: hishamsauk on Mar 21, 2011
Copyright:Attribution Non-commercial

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12/16/2012

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E
UROPEAN
E
CONOMICS
: T
HE
Q
UEST FOR
M
ONETARY
S
TABILITY
 
C
ONTEXT
The 1930·s were characterised by
uncertainty
;competitive devaluations, trade wars etc.
F
rom 1944-1973 the Bretton Woods systemhelped to reduce that uncertainty by being ¶fixed·but ¶flexible·.
The need for a specifically European exchangeRate Mechanism came after the collapse of theBretton Woods system.
Th
e
¶s
nake·
 
(
a smaller band of fluctuation - 4.5%- inside the larger 9% official band against the $)was a failure due to the incredibly turbulenttimes
(
oil shocks).
 
T
HE
E
ND OF THE
S
NAKE
,
THE
R
ISE OFTHE
EMS
Europe wanted to achieve MONETARY STABILITY.
F
or this, they needed to achieve:
1)
EXCHANGE RATE STABILITY
2
)
POLICY CONVERGENCE
The four reasons for disliking a volatile exchange ratewere:
i ² 
Legacy of the 30·s
(
distrust of uncontrolled
FX
 markets).
ii ² Ex. Rate fluctuations
w
ould endanger the progressto
w
ards a single market.
iii ² Changes in the exchange rate
affected the CAP most
(
CAP dominated the budget).
iv ² 
A lack of care from the US 
about how the fallingvalue of the $ affected the competitiveness of Europe·scurrencies
(
falling $, appreciating DM [Q = EP*/P]).

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