Abstract
The theory of optimum currency areas (OCAs) was discussed briefly towards the end of Chapter 7. From this discussion emerged a list of characteristics which assist in demarcating the boundaries of an OCA. Also implicit in the discussion was the question of whether a country should join a currency area by pegging the value of its currency to those of other currencies in the area, or whether it should remain outside the area and retain the freedom to operate an independent exchange-rate policy.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsPreview
Unable to display preview. Download preview PDF.
Notes and References
This option was open to countries which had not participated in the ‘snake’.
Further discussion of these criteria may be found in Chapter 7 and the literature referred to there.
The so-called Scandinavian model of inflation was built on the basis of productivity growth differentials between open and closed sectors, see, for example, Gosta Edgren, Karl-Olof Faxen and Clos-Erik Odhner, Wage Formation and the Economy (London: Allen & Unwin, 1973).
For a catalogue of such policies see Horst lingerer, with Owen Evans and Peter Nyberg, The European Monetary System: The Experience, 1979–82, IMF Occasional Paper, 19, 1983.
In the early 1970s, for example, only about 31 per cent of the UK’s trade was with the rest of Europe, while for some other European countries the figures were as follows: Netherlands 68 per cent; Belgium-Luxembourg 73 per cent; Ireland 74 per cent, Denmark 45 per cent, Germany, 51 per cent; Italy, 50 per cent; France, 56 per cent.
However, it may be argued that with full participation in the EMS, the UK’s percentage of intra trade would rise as such trade would be encouraged by the fixity of exchange rates.
The costs of inflation are discussed concisely in Roger Bootle, ‘How Important Is It to Defeat Inflation — the Evidence’, Three Banks Review, December, 1981.
Just how large are the costs of operating at a non-optimal point on the Phillips curve depends on the shape of the curve. With a vertical Phillips curve there is no long-run unemployment cost associated with reducing inflation, although even here there may be significant shorter run adjustment costs. A discussion of factors influencing the shape of the Phillips curve and the related discussion of rational and adaptive expectations lies beyond the scope of this book.
It needs to be recognised that devaluation may itself contribute to inflation. In principle, a vicious circle can be established with inflation leading to devaluation, and devaluation causing more inflation which, in turn, leads to further devaluation. The idea of a vicious circle between inflation and devaluation is discussed briefly in Chapter 7.
Author information
Authors and Affiliations
Copyright information
© 1987 Graham Bird
About this chapter
Cite this chapter
Bird, G. (1987). The European Monetary System and the United Kingdom. In: International Macroeconomics. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-137-09829-0_11
Download citation
DOI: https://doi.org/10.1007/978-1-137-09829-0_11
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-0-333-44411-5
Online ISBN: 978-1-137-09829-0
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)