Abstract:

The evidence presented here suggests that European Monetary System has indeed coincided with more predictable exchange rates (nominal and real) between France, Germany and Italy. But if increased monetary policy coordination is the main explanation, then it is surprising that the conditional variance of real interest differentials between these countries does not appear to have fallen (unless the disturbances are mostly real, in which case fixed rates are suboptimal). High onshore-offshore interest differentials for franc and lira assets, and the very slow convergence of intra-EMS inflation rates, suggest that capital controls have played a large role.

Notes:

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