ABSTRACT
In Europe for a long time period, from 1979 to 1999, a pegged exchange rate system was the dominant exchange rate arrangement. In January 1999, the European Monetary System (EMS), under which the currencies of the member states of European Union (EU) were pegged within a band, was replaced by a single currency the Euro. For the time period from 1979 to 1999, the German monetary policy when it was confronted with a secular rise of unemployment in the 1980s and 1990s, operated under the EMS. Germany was the dominant country in Europe and other countries had, to a great extent, to follow Germany’s monetary policy Kenen (2002) calls this the leader-follower model. On the other hand, German monetary policy operating under the EMS, was restricted by an open economy dynamic.
