The research examined the impact of the monetary exchange rate regime of the European Monetary System (EMS) on inflation within and payments balances among the member states of the European Communities (EC). The EC is an umbrella name for a broad spectrum of organizations linking most of the nations of Western Europe. The exchange rate regime is the essential aspect of the functioning of the EMS, which is one element in the structure of the EC.
This examination was performed within the context of the following presumption: "It is a dangerous fallacy to think that EMS membership will permit the control of inflation. The truth is that EMS member countries only buy off inflation with payments balance deficits." As the impact of the exchange rate regime on inflation and payments balances was examined, this presumption was assessed.
Theoretical Explanation andDiscussion
Assumptions with respect to relationships between exchange rate regimes, levels of inflation, and payments balances are based upon economic concepts and theories concerning the international transmission of inflation, the effects of exchange rates on inflation, and the effects of both inflation levels and exchange rates on payments balances. Unfortunately, these concepts and theories are, to an extent, similar to religious tenets, in that they can be interpreted in different ways to support opposing positions on the same divisive issue.International Transmission
Bruner and Meltzer (1977) pointed out that the explanations for international inflation can, generally, be placed in one of two categories: (1) sociological causes, in which it is asserted that movements in prices and wages proceed independently of market conditions; and 2) economic causes, which emphasize the essential interdependence between price and wage movements and evolving market conditions. Their research led them to assert that the actual cause of international inflation is probabl...