Intervention, Policy Coordination and the Future of EMU: A German Perspective

The paper aims at understanding why and how central banks have intervened in foreign exchange markets, and whether intervention was (i) coordinated, (ii) sterilized, and (iii) effective. The experience in the G-3 context is compared to the past EMS experience. In addition to foreign exchange intervention, the issue of international monetary policy coordination is discussed, again both within the G-3 and the EMS context. Based on this quantitative evaluation, the recent EMS crisis between September 1992 and August 1993 is reviewed and an attempt is made to explain why the EMS has failed. It is argued that whilst German unification played a role in the fall of the EMS, the blame for the failure of the EMS should not be placed on the Bundesbank alone.