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Exchange Rate Stability and Political Accountability in the European Monetary System. University of Illinois EUC Working Paper, Vol. 1, No. 1

Bernhard, William T. (2002) Exchange Rate Stability and Political Accountability in the European Monetary System. University of Illinois EUC Working Paper, Vol. 1, No. 1. [Working Paper]

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      Abstract

      The European Monetary System (EMS) created a policy standard—exchange rate stability—which domestic constituents could use to evaluate their government’s policy choices. Domestic social coalitions in favor of macroeconomic discipline could punish governments that violated this standard. I test the argument that devaluations within the EMS negatively affect the devaluing government’s approval ratings by using the London School/Hendry approach to model the approval ratings of the French prime minister and president from 1981–1992. The results indicate that devaluations did hurt the government’s approval ratings. I contend that the domestic political cost for violating the focal point of exchange rate stability provided member governments with an additional incentive to pursue disciplined economic policies throughout the 1980s. The incentive to avoid currency devaluations also helped to shape the response to the twin shocks of German monetary unification and the Maastricht Treaty. Since realignment would have damaged their domestic popularity, member governments were unwilling to adjust their parities, leading to the collapse of the EMS.

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      Item Type: Working Paper
      Uncontrolled Keywords: European Monetary System (EMS); exchange rate stability; London School/Hendry approach.
      Subjects for non-EU documents: Countries > France
      EU policies and themes > EU institutions & developments > institutional development/policy > historical development of EC (pre-1986)
      EU policies and themes > Policies & related activities > economic and financial affairs > monetary policy
      EU policies and themes > Policies & related activities > economic and financial affairs > EMU/EMS/euro
      Subjects for EU documents: UNSPECIFIED
      EU Series and Periodicals: UNSPECIFIED
      EU Annual Reports: UNSPECIFIED
      Series: Series > University of Illinois (Champaign-Urbana), European Union Center > Working Papers
      Depositing User: Phil Wilkin
      Official EU Document: No
      Language: English
      Date Deposited: 14 Jul 2003
      Page Range: p. 24
      Last Modified: 15 Feb 2011 17:16
      URI: http://aei.pitt.edu/id/eprint/719

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