ERM crisis in retrospect: What if a European central bank had been in existence before 1992?

This paper explores whether policy coordination or a single monetary policy implemented earlier would have kept the U.K. in the process of European monetary integration. On the basis of the pre-ERM crisis empirics by Douven and Plasmans (1996), a counterfactual game simulation approach is used, and five scenarios are established for comparison with the actual historical records. The final answer is negative.

Research highlights► A counterfactual analysis is to see what if the euro was in existence before 1992. ► The game model can infer welfare and policy responses of the countries involved. ► Germany, France and the U.K. would not be better if the euro were established earlier. ► Moreover, policy coordination cannot prevent the ERM from collapse.