Monetary Policy under a Fixed Exchange Rate Regime, the Case of France 1987-1996
Ihis paper describes the implementation of monetary policy by the Banque de France during the period beginning in January 1987. This period was characterised by a quasi-fixed exchange rate for France, as the franc was never realigned within the European Monetary System (EMS). The behaviour of the Banque de France is modelled with VAR models, which are a means of breaking down the dynamics of interdependent time series of macroeconomic variables, into the various sources of exogenous fluctuations. In the case of an open economy the modelling of the monetary policy requires a careful account for the exchange rate impact on the short-term interest rate. This is even more tricky in the countries like France who target a fixed exchange rate to the DM. Even in the very short term, a variation of the interest rate can be interpreted either as a response to a demand shock for currencies, or as a genuine shock of monetary policy.
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