To: Enigma who wrote (34599 ) 5/28/1999 12:49:00 PM From: Zardoz Respond to
From the Bank of Canada:Currency crises and fixed exchange rates in the 1990s: Western Europe (1992– 93) In the fall of 1992, the exchange rates of several European countries, most notably those of Italy, the United Kingdom, Sweden, and Norway, came under severe pressure and were either devalued or forced to float. The underlying causes of these crises were rising German interest rates and increasing unemployment and output gaps that the market judged to be politically too costly for governments to endure. Prevailing real exchange rate levels were widely perceived as misaligned; some adjustment seemed inevitable. The political uncertainty surrounding the outcome of the Danish and French referendums on the Maastricht treaty further undermined the credibility of commitments to maintain fixed exchange rates. Based on the European experience, Krugman (1997) makes several remarks: first, the timing of the crises was largely unanticipated by the market; second, the importance of large market players in triggering speculative attacks is unclear; and third, the countries that left the European Monetary System performed significantly better in terms of both output and inflation than those countries that came under attack but remained in the system (e. g., the United Kingdom versus France). "The cost of a devaluation includes the political and reputational damage of not honouring a commitment to maintain the fixed rate, the potential cost of bailing out domestic borrowers of foreign exchange (primarily domestic banks), and any possible damage to trade or foreign investment. The cost of defending the fixed rate includes the employment and output losses as well as the larger fiscal deficits and debt payments resulting from higher interest rates and the overvalued real exchange rate. "increase debt or inflation . Thus the floating rate system is better. Is this the number one reason that Britain is going to a floating rate regime now. Have they finally clued in that a floating exchange rate mechanism is more supportive of low inflation, lower debt, and lower unemployment. This 15% gold for Euro can easily be eaten by continue pressure.ftp.bank-banque-canada.ca
