Question
cap 10 9. It might be argued that Italy has gained discipline by agreeing to align its exchange rate with the German mark [as part
cap 10
9. "It might be argued that Italy has gained discipline by agreeing to
align its exchange rate with the German mark [as part of its membership in the EMS]. This arrangement works because both countries
are responsible for intervening according to clearly specified
rules, because membership in the European Monetary System (EMS)
is valuable, and because failure to comply with the rules of membership
may lead to ejection from the [EMS]." (Calomiris 1995, p. 273)
(a) Assume that the Bank of Italy does gain "discipline" by agreeing
to an exchange-rate alignment, i.e. that it loses discretion
over monetary policy. Why might losing its discretion be a
good thing from the point of view of the average Italian citizen,
and even from the point of view of the Bank of Italy's governors?
(b) Why does it matter that the rules, defining what the Bank of
Italy is to do as an EMS member, are clearly specified and strictly
enforced?
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