Abstract
Existing theoretical models cannot explain the following features of the EMS and its crisis in 1992: its progressive hardening from 1987 onwards; the fact that credibility was ‘shared’ the progressive deterioration of credibility after the first Danish referendum without changes in the economic fundamentals. This paper argues that the reason lies in the fact that the literature has not accounted for the changes in the perceived prospects of EMU. We show that an adjustable peg regime that incorporates these prospects can explain the three features listed above.
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