Credibility, Interest Rates and the ERM: The Irish Experience.

This paper examines the effects on short-term interest rates of stabilizing the Irish pound in the exchange rate mechanism of the European Monetary System since 1986. It is shown that Irish interest rates came increasingly under the influence of German rates but British rates continued to exert a significant influence. Moreover, the markets viewed the Irish commitment to the exchange rate mechanism as contingent on a sustainable exchange rate against sterling. The markets viewed Ireland's exchange rate mechanism peg as unsustainable after the devaluation of sterling in September 1992. Copyright 1993 by Blackwell Publishing Ltd