Since the European Monetary System was instituted in March 1979, there has been a dramatic reduction in the inflation rates of member countries This development is widely attributed to the EMS itself. The purpose of this paper is to argue that the theoretical and empirical basis for such a claim is far from conclusive. On the theoretical side, the paper develops a model which highlights two issues. First, changes in the "rules" of the exchange rate system need not coincide with changes in expectations about Central Bank behavior. In fact, I expectations in France do not seem to have changed until policy makers "got tough" in 1982-83. Second, different researchers have made quite different I assumptions about exactly what "rules" the EMS imposes. The paper shows that how the system works matters in terns of the effect joining will have on inflation. On the empirical side, the paper shows that effects which have been attributed to the EMS are in large part due to the global deflation since 1979 and to the fact that EMS members had relatively low inflation before 1979. However, even these estimates should be interpreted with caution. They are very sensitive to time period and to which non EMS countries are included in the sample.
