Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
9725871 | International Review of Economics & Finance | 2005 | 15 Pages |
Abstract
This paper investigates the incentives of a central bank in a country whose currency is the anchor of a monetary union. It is shown that if actual monetary policies of the central bank cannot be perfectly observed, then, the central bank comes to have an incentive to give a larger weight to its own country's interests at the expense of partner countries. The analysis then derives a deterrence condition such that the anchor country's central bank has no incentive to renege. This model will explain the behavior of the Bundesbank in July 1992 and the succeeding secession of Italy and the UK from the Exchange Rate Mechanism (ERM).
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Teruyoshi Kobayashi,