Faculty of Economics and Business Administration Publications Database

Monetary Policy Targets and the Stabilization Objective: A Source of Tension in the EMS

Volume: 15
Number: 1
Pages: 95 - 116
ISSN-Print: 0261-5606
Year: 1996
Keywords: European Monetary System; Economic stabilization
Abstract: This paper evaluates two different monetary regimes in the EMS: an asymmetric regime with EMS monetary policy oriented towards German targets and a symmetric regime with EMS-wide targets. Deterministic and stochastic simulations of a macroeconometric model are used to study spillovers, adjustment and stabilization in EMS economies. They show that there exists a significant trade-off between the two regimes in terms of output and price deviations from target. While Germany enjoys more stability under the asymmetric regime, the other EMS economies are stabilized more effectively by a symmetric target. The resulting tension must have been at least partly responsible for the recent EMS crises.