The Historical Setting

  • Aerdt C. F. J. Houben
Part of the Financial and Monetary Policy Studies book series (FMPS, volume 34)


Selecting a monetary policy strategy is an ongoing activity. Changing circumstances, adaptations in preferences, and advances in the understanding of how economies work each imply that the strategic orientation of monetary policy needs to be kept under continuous review. At the same time, given the uncertainty inherent in economic relationships and in decisions on prospective developments, as well as the importance of stabilising expectations, constancy in the monetary strategy choice runs at a premium. The adage ‘if it ain’t broke, don’t fix it’ clearly applies to the domain of monetary strategy. In this respect, the evolution of monetary policy strategies in Europe over the past quarter of a century is characterised by a degree of inertia, with changes often prompted by a financial crisis. Indeed, this evolution should be seen against the backdrop of the collapse of the international monetary system of Bretton Woods, which necessitated a fundamental adaptation of European monetary policy frameworks and prompted greater soul-searching in the monetary strategy choice.


Exchange Rate Monetary Policy Optimal Currency Area Dollar Exchange Rate International Monetary System 
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  1. 1.
    The IMF’s Articles of Agreement only commit members to full convertibility on current account transactions (Article VIII), and even this commitment is open-ended (existing restrictions are grandfathered under the transitional arrangements of Article XIV). An amendment to incorporate an objective of capital account convertibility into the Articles is currently under discussion.Google Scholar
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    Although inflation had been lower during the classical gold standard (1881–1913) and the inter-war period (1920–38) including the short-lived restoration of gold exchange, it was most stable during the convertible period of Bretton Woods (1959–1971); see Bordo and Jonung(1997).Google Scholar
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    According to this agreement concluded in April 1971, the EC currencies were to fluctuate by no more than ± 1.2 percent of each other, against an effective margin for cross parities of ± 2 percent under the Bretton Woods accord (as implied by the ± 1 percent margin for individual currencies against the US dollar). However, the EC central banks suspended their agreement before its scheduled implementation in June, as Germany and the Netherlands had temporarily allowed their currencies to float in May. For a discussion of the decisions in response to the Werner Report, see lingerer (1997, pp. 114-116).Google Scholar
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    The ± 2.25 percent fluctuation band, copied from the Smithsonian agreement, was to remain a central feature of European exchange rate agreements for more than two decades. Although the two decimal point bandwidth suggests great precision and well-founded institutional motives, Oort (1979, p. 194) recalls that the decision “was taken in a rather offhand manner, without preparation of any kind and determined as an average of the US desire for even wider margins and the European wish to go less far.”Google Scholar
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Copyright information

© Springer Science+Business Media Dordrecht 2000

Authors and Affiliations

  • Aerdt C. F. J. Houben
    • 1
  1. 1.De Nederlandsche BankAmsterdamThe Netherlands

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