EVALUATING THE U.K.‘S CHOICE OF ENTRY RATE INTO THE ERM

Simon J.Q. Wren-Lewis · Peter F. Westaway · Soterios Soteri · Ray J Barrell

25 citations0/0 files storedManchester School

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Global Financial Crisis and Policies Monetary Policy and Economic Impact European Monetary and Fiscal Policies

Abstract

The paper discusses how a country should choose the rate at which it enters a fixed or quasi-fixed exchange rate zone. It is argued that entry must be consistent with the economy's fundamental equilibrium exchange rate, but that governments can influence the speed of convergence to the fundamental equilibrium exchange rate. Once entry has occurred, this can either involve using fiscal policy to alter the economy's transitional inflation path or monetary policy to move within the currency band. This framework is applied to U.K. entry into the European Monetary System and suggests that entry was at an unrealistically high rate.

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References

1985The Causes of British Unemployment 2005Concepts of Equilibrium Exchange Rates 1989Fundamental Equilibrium Exchange Rates for the G7.1991The Role of the Real Exchange Rate and Capacity Utilisation in Convergence to the Nairu 1988Supply, Liquidity and Credit: a New Version of the Institute's Domestic Econometric Macromodel

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