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Why ems provisions for extension of central bank credits

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Reference no: EM13868863

1. Why might EMS provisions for the extension of central bank credits from strong- to weak-currency members have increased the stability of EMS exchange rates?

2. In the EMS before September 1992, the Italian lira/DM exchange rate could ?uctuate by up to 2.25 percent up or down. Assume that the lira/DM central parity and band were set in this way and could not be changed. What would have been the maximum possible difference between the interest rates on one-year lira and DM deposits? What would have been the maximum possible difference between the interest rates on six-month lira and DM deposits? On three-month deposits? Do the answers surprise you? Give an intuitive explanation.

Reference no: EM13868863

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