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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page European Monetary Arrangements: Implications for the Dollar, Exchange Rate Variability and Credibility
Hali J. Edison and Linda S. Kole
1994-468  (May 1994)

Abstract:  This paper uses the recent history of the ERM to gain insights into what might happen to exchange rates on the road to EMU. To do this, the paper examines the variability of exchange rates, the transmission of monetary policy between countries, the role of the dollar in ERM exchange rate crises, and ERM members' credibility as measured by the realignment probabilities prior to the September 1992 crisis. We find that behavior of exchange rates has changed over time and differs between ERM and non-ERM currencies. We identify two factors that might have contributed to the September 1992 crisis: high German interest rates and weakness of the U.S. dollar.

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