a fianna fail government, in apparent response to which the irish banks, seemingly fearful of radicalism, widened their lending spreads over the london bank rate ( cf. o grada, 1994 ). the other notable exception was in the mid - 1950s when, in a mistaken presumption that some monetary independence could be retained despite the exchange rate peg, irish official and bank lending rates were held down despite increases in london. this latter episode was marked by an outflow of funds for which the adopted remedy was an overdose of fiscal austerity ( as it would be termed now ) associated with a recession and a surge in emigration. the power of the financial markets in influencing fiscal policy was thus displayed earlier than many may realise. inflation too tracked that in the uk rather closely in the sterling link decades, except during the period of wartime price controls. the pass - through was not immediate or exact, 3 but, taking one - year with the next, it was inescapable. to that extent, the sterling link imported to the dublin - based authorities the credibility of the london authorities in regard to inflation, though by the 1970s, this was nothing to write home about ( figure 3 ). so, for three - quarters of a century after independence, ireland maintained a one - to - one peg with sterling. at first, this was not an unusual position for a post - colonial country. but, one - byone, each of the former countries of the sterling area abandoned such a link, typically very soon after independence ( honohan and lane, 1999 ). some countries were motivated either by economic nationalism or a desire to exploit the apparent pro - growth potential of an autonomous currency. the break in other countries was driven by unsustainable expansionary moneyfinanced fiscal policy. by 1978 only sierra leone and ireland were left as members of the sterling area. exchange rate mechanism of the european monetary system 1979 – 1993 ireland had begun to toy with a break in the arrangement from at least as early as 1976, when sterling took an alarming slide against the us dollar ( and against the currencies of the european “ snake ” linked to the deutsche mark ), triggering irish inflation. the strongest economic arguments for a break were ( i ) the fact that the currency link to what had been the epitome of financial strength no longer provided financial stability, combined with ( ii ) a perception that the long - period of relative economic decline for the uk would continue and for example

is the bipolar view correct? ” journal of economic perspectives 15 ( 2 ) : 3 - 24. gerlach, stefan and rebecca stuart. 2014. “ money, interest and prices in ireland, 1933 – 2012. ” central bank of ireland technical paper 07 / rt / 14. honohan, patrick. 1997. “ currency board or central bank? lessons from the irish pound ’ s link with sterling, 1928 – 79 ”. banca nazionale del lavoro quarterly review 200 : 39 – 70. honohan, patrick. 2002. “ using other people ’ s money : farewell to the irish pound. ” history ireland 10 ( 1 ) : 34 – 37. honohan, patrick and charles conroy. 1994. irish interest rate fluctuations in the european monetary system. ( dublin : economic and social research institute ). honohan, patrick and gavin murphy. 2010. “ breaking the sterling link : ireland ’ s decision to enter the ems. ” iiis discussion paper no. 317, trinity college dublin. o grada, cormac. 1994. ireland : a new economic history 1780 – 1939. ( oxford university press ). thom, r. and b. walsh. 2002. “ the effect of a currency union on trade : lessons from the irish experience, ” european economic review 46, 1111 – 1123. bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches