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 rare 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).