Irish exchange rate policy in the aftermath of the currency crisis

Sterling's departure from the exchange rate mechanism (ERM) in September 1992 precipitated a crisis for Irish exchange rate policy that was resolved, for the time being at least, by the decision to devalue at the end of January 1993. During the intervening 4 1/2 months, the economy laboured under the burdens of penal interest rates and a misaligned sterling exchange rate. The country's foreign exchange reserves were drained, to be rebuilt later at a substantial cost to the taxpayer. With the virtual collapse of the ERM at the end of July, Irish exchange rate policy entered a new phase. This paper reviews the lessons to be learned from the collapse of the ERM and the options facing us in the new international financial environment.