Exchange Rate-Based Stabilization in Western Europe: Greece, Ireland, Italy and Portugal
IMF Working Papers, June 1, 1997
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- Exchange Rate-Based Stabilization in Western Europe: Greece, Ireland, Italy and Portugal
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Bibliographic details
- Authors: Enrica Detragiache, A. J Hamann
- Published: June 1, 1997
- Series: IMF Working Papers
Summary
- This paper compares the experience with exchange-rate–based stabilization (ERBS) of four Western European countries with that of high-inflation developing countries.
- In general, the behavior of key macroeconomic variables—inflation, output, demand, the real exchange rate and the current account—in the four countries examined did not correspond to the pattern observed in developing countries.
- Some resemblance to the developing-country pattern could be found in Italy in 1987–92 and Greece in 1994–96.
- The experience with ERBS in Western Europe highlights the importance of incomes policy as an ingredient of a successful stabilization program.
- The paper shows that the adoption of a looser anchor does not necessarily reduce the output cost of disinflation.
Key findings and observations
- Comparative behavior of macroeconomic variables (inflation, output, demand, real exchange rate, current account) in Greece, Ireland, Italy, and Portugal differs from the pattern seen in high-inflation developing countries.
- Exceptions with resemblance to developing-country patterns:
- Italy in 1987–92.
- Greece in 1994–96.
- Incomes policy is identified as an important component for successful ERBS programs in the Western European context.
- Looser nominal anchors do not automatically lead to lower output costs during disinflation.
Policy implications and recommendations
- Incorporate incomes policy as a complementary element in exchange-rate–based stabilization programs to improve chances of success.
- Do not assume that adopting a looser anchor will reduce the output cost of disinflation; policy design must account for this potential trade-off.
Subject tags and keywords
- Subject: Disinflation, Exchange rates, Fiscal consolidation, Fiscal policy, Foreign exchange, Inflation, Prices, Real exchange rates
- Keywords: current account, Disinflation, exchange rate, Exchange rates, Fiscal consolidation, Inflation, inflation country, inflation differential, inflation stabilization, Irish pound, Real exchange rates, stabilization program, Western Europe, WP
Exchange Rate-Based Stabilization in Western Europe: Greece, Ireland, Italy and Portugal — IMF Working Paper No. 1997/075 (June 1, 1997) by Enrica Detragiache and A. J Hamann.
Content in this bundle
- Exchange Rate-Based Stabilization in Western Europe: Greece, Ireland, Italy and Portugal-WP/97/75