Monetary Policy on the Road to EMU: the Dominance of External Constraints on Domestic Objectives

We estimate forward-looking interest-rate reaction functions Exchange Rate Model for four ERM countries. Reputational factors and convergence to the German inflation rate are found to be the main policy goals. We cannot detect evidence that the target zone band was exploited to implement countercyclical policies: Thus, their enthusiastic joining of EMU is not particularly surprising, as the ECB's policies are more likely to take into account their national preferences than the Bundesbank did under the ERM regime.