EXCHANGE RATE-BASED STABILIZATION IN WESTERN EUROPE: GREECE, IRELAND, ITALY, AND PORTUGAL

This paper reviews the experience with exchange rate-based stabilization of four Western European countries–Italy, Ireland, Portugal, and Greece–in 1980–1996 and compares it with the experience of high-inflation developing countries. We find that inflation stabilization was contractionary, in contrast with the expansionary cycle observed in high-inflation countries, although some real exchange rate appreciation took place. Also, frequent adjustments of the exchange rate peg or even its abandonment did not lead to a resumption of inflation, so stabilization programs were successful in all four countries. ( JEL E31, F41)