MONETARY-POLICY TARGETS AND THE STABILIZATION OBJECTIVE - A SOURCE OFTENSION IN THE EMS

This paper evaluates two different monetary regimes in the EMS: an asy mmetric regime with EMS monetary policy oriented towards German target s and a symmetric regime with EMS-wide targets. Deterministic and stoc hastic simulations of a macroeconometric model are used to study spill overs, adjustment and stabilization in EMS economies. They show that t here exists a significant trade-off between the two regimes in terms o f output and price deviations from target. While Germany enjoys more s tability under the asymmetric regime, the other EMS economies are stab ilized more effectively by a symmetric target. The resulting tension m ust have been at least partly responsible for the recent EMS crises.