Credibility, interest rates and the ERM : the Irish experience, 1986-92

As one of a set of policies designed to reduce inflation and interest rates to the levels prevailing in Germany the Irish pound has been stabilised in the Exchange Rate Mechanism (ERM) of the European Monetary System since 1986. This paper examines the effect of this policy on short-term interest rates in Ireland. Only limited evidence is found that the exchange rate policy contributed to the reduction in the German-Irish interest rate differential. Sterling interest rates and the level of the Irish pound/sterling exchange rate have continued to influence the level of Irish interest rates. This was bourne out by the impact of the turbulence of September 1992 on Irish money markets. It is suggested that the costs of rigidly pegging the Irish pound in the ERM may outweigh the benefits of this policy.A hard copy is available in UCD Library at GEN 330.08 IR/UN