| Summary: | The aim of the thesis is to contribute to the debate over the past experience of the ERM and the prospect of the creation of EMU, both by throwing new light on issues where no agreement has been reached in the literature and by investigating important areas so far overlooked Methodologically, we will consider existing theories and test for their empirical implications by applying time series econometric techniques; and for the ERM crisis of 1992 we develop our own theoretical model and provide preliminary empirical results on its implications In the first chapter we consider the process of disinflation which Europe and the US experienced in the 1980s and adopt the Hamilton filter for the analysis of inflation differentials for the ERM countries against Germany The results are supportive of the view that the ERM membership helped inflation-prone countries to reduce inflation in the first phase of their commitment to stable exchange rates, but they also show that a sizeable positive differential persisted for Italy In the second chapter we test for the validity of the empirical implication for expected realignments of the model of target zones, proposed by Bertola and Svensson, and show that these are not corroborated by our results. In the third chapter we propose a theoretical model of the ERM crisis of 1992, which focuses on how the attitude of the Bundesbank towards the defence of the weak currencies in the system feeds into market expectations of the sustainability of the System and of future exchange rates The empirical implication of our theoretical model, as for expected devaluations, is considered in details and tested in chapter four, the results seem to be consistent with the model. In chapter five we investigate whether the EU as a whole has the characteristics necessary for a successful currency union and in particular focus on how employment shocks spread in Europe, the results seem to support the call for a two-speed Europe.
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