DP326 | The Cost of Disinflation and the European Monetary System

Author(s)

Publication Date

01/07/1989

JEL Code(s)

Keyword(s)

Programme Area(s)

Abstract

In this paper we present empirical evidence indicating that the EMS countries have experienced a worsening of their inflation/unemployment trade-off since 1979 which on average was more pronounced than in the rest of the OECD area (including the other European countries). We interpret this evidence as follows: the EMS forced its high-inflation members to follow gradual disinflationary policies. As a result, the authorities of these countries gained reputation only slowly compared with countries which applied a shock therapy (UK, US). This also forced them to apply deflationary policies longer than if they had used a shock therap.