Article ID Journal Published Year Pages File Type
9725871 International Review of Economics & Finance 2005 15 Pages PDF
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
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