Dominant Currency Hypothesis And Credibility Issues: The Case Of European Monetary System

Öz Linked to the gold standard of post war Monetary System, Bretton Woods System governed world-wide bilateral exchange rates successfully over the decades. The monetary stability that had been reached and maintained over the years within the system was largely attributed to the design of the system within which U.S. had undertaken the dominant role in determining the monetary trajectory for other participants. The international or regional monetary systems worked on the basis of likewise leadership models, would pave the way for theoretical considerations in the literature. Dominant Currency Hypothesis is to explain that in a given fixed exchange rate system in which there are n numbers of the participant currencies, if there is a leading country which is relatively stronger than others in economic terms; its currency will equally be stronger and will be able lead others in terms of monetary policy. The leading country authorities will hold total independence in monetary policy making whereas the followers will be bound by the actions of leader country. That is to say, the anchor country independently determines its domestic monetary policy path whereas the weak currencies’ monetary authorities would have to follow its foot steps passively in the hope of gaining anti-inflationary credibility. Regarding the European Monetary System (EMS), The Bundesbank would act as an anchor in the EMS. Other members, particularly those with high inflationary reputation would benefit by subscribing to the policies of the anchor. The disciplinary policies determined by Bundesbank would be imitated by them.

Anahtar Kelimeler:

Dominant Currency Hypothesis, German Dominance, European Monetary System, Exchange Rate Mechanism, Bretton Woods System

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