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European monetary arrangements: Implications for the dollar, exchange rate variability and credibility

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  • Mali J. Edison
  • Linda S. Kole

Abstract

This paper uses the recent history of the ERM to gain insights into what might happen to exchange rates on the road to EMU. to do this, the paper examines the variability of exchange rates, the transmission of monetary policy between countries, the role of the dollar in ERM exchange rate crises, and ERM members' credibility as measured by the realignment probabilities prior to the September 1992 crisis. We identify two factors that might have contributed to the September 1992 crisis: high German interest rates and weakness of the US dollar. We find that behaviour of exchange rates has changed over time and differs between ERM and non-ERM currencies. We also demonstrate that changes in German short-term interest rates influence interest rates in other ERM countries and vice versa. Copyright Blackwell Publishers Ltd. 1995.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-036X.1995.tb00007.x
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Bibliographic Info

Article provided by European Financial Management Association in its journal European Financial Management.

Volume (Year): 1 (1995)
Issue (Month): 1 ()
Pages: 61-86

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Handle: RePEc:bla:eufman:v:1:y:1995:i:1:p:61-86

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  1. Hali J. Edison & Joseph E. Gagnon & William R. Melick, 1994. "Understanding the empirical literature on purchasing power parity: the post-Bretton Woods era," International Finance Discussion Papers 465, Board of Governors of the Federal Reserve System (U.S.).
  2. Giavazzi, Francesco & Pagano, Marco, 1986. "The Advantages of Tying One's Hands: EMS Discipline and Central Bank Credibility," CEPR Discussion Papers 135, C.E.P.R. Discussion Papers.
  3. Bertola, Giuseppe & Svensson, Lars E O, 1993. "Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 689-712, July.
  4. Katsimbris, George M & Miller, Stephen M, 1993. "Interest Rate Linkages within the European Monetary System: Further Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(4), pages 771-79, November.
  5. Bruce Mizrach, 1993. "Target zone models with stochastic realignments: an econometric evaluation," Research Paper 9302, Federal Reserve Bank of New York.
  6. Fred G M C Nieuwland & Willem F C Verschoor & Christian C P Wolff, 1990. "EMS Exchange Rates," CEPR Financial Markets Paper 0002, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
  7. Giavazzi, Francesco & Spaventa, Luigi, 1990. "The `New' EMS," CEPR Discussion Papers 369, C.E.P.R. Discussion Papers.
    • Francesco Giavazzi & Luigi Spaventa, 1990. "The "New" EMS," Working Papers 86, Dipartimento Scienze Economiche, Universita' di Bologna.
  8. Svensson, L.E., 1990. "The Foreign Exchange Risk Premium in a Target Zone with Devaluation Risk," Papers 475, Stockholm - International Economic Studies.
  9. Jeroen J.M. Kremers & Neil R. Ericsson & Juan J. Dolado, 1992. "The power of cointegration tests," International Finance Discussion Papers 431, Board of Governors of the Federal Reserve System (U.S.).
  10. Zhaohui Chen & Alberto Giovannini, 1993. "The Determinants of Realignment Expectations Under the EMS: Some Empirical Regularities," NBER Working Papers 4291, National Bureau of Economic Research, Inc.
  11. Diebold, Francis X & Husted, Steven & Rush, Mark, 1991. "Real Exchange Rates under the Gold Standard," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1252-71, December.
  12. Chen, Zhaohui & Giovannini, Alberto, 1993. "The Determinants of Realignment Expectations Under the EMS - Some Empirical Regularities," CEPR Discussion Papers 790, C.E.P.R. Discussion Papers.
  13. Andrew K. Rose & Lars E.O. Svensson, 1991. "Expected and predicted realignments: the FF/DM exchange rate during the EMS," International Finance Discussion Papers 395, Board of Governors of the Federal Reserve System (U.S.).
  14. W. R. M. Perraudin & E. H. Gardner, 1992. "Asymmetry in the ERM," IMF Working Papers 92/96, International Monetary Fund.
  15. Neumann, Manfred J.M. & von Hagen, Jürgen, 1992. "Real Exchange Rates Within and Between Currency Areas: How Far Away is EMU?," CEPR Discussion Papers 660, C.E.P.R. Discussion Papers.
  16. Lindberg, Hans & Soderlind, Paul & Svensson, Lars E O, 1993. "Devaluation Expectations: The Swedish Krona 1985-92," Economic Journal, Royal Economic Society, vol. 103(420), pages 1170-79, September.
  17. Hali J. Edison & Eric Fisher, 1989. "A long-run view of the european monetary system," International Finance Discussion Papers 339, Board of Governors of the Federal Reserve System (U.S.).
  18. Jeff Frankel, Steve Phillips, and Menzie Chinn., 1992. "Financial and Currency Integration in the European Monetary System: The Statistical Record," Center for International and Development Economics Research (CIDER) Working Papers C92-005, University of California at Berkeley.
  19. Hagen, Jurgen von & Fratianni, Michele, 1990. "German dominance in the EMS: evidence from interest rates," Journal of International Money and Finance, Elsevier, vol. 9(4), pages 358-375, December.
  20. Michael J. Artis & Mark P. Taylor, 1993. "The Stabilizing Effect of the ERMon Exchange Rates and Interest Rates," IMF Working Papers 93/67, International Monetary Fund.
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Citations

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Cited by:
  1. Christopher J. Neely, 1994. "Realignments of target zone exchange systems: what do we know?," Working Papers 1994-020, Federal Reserve Bank of St. Louis.
  2. Vuyyuri, S., 2004. "Linkages of Indian Interest Rates with US and Japanese Rates," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 4(2).
  3. Michael Hu & Christine Jiang & Christos Tsoukalas, 2004. "The volatility impact of the European monetary system on member and non-member currencies," Applied Financial Economics, Taylor & Francis Journals, vol. 14(5), pages 313-325.
  4. McCauley, R.N., 1997. "The Euro and the Dollar," Princeton Essays in International Economics 205, International Economics Section, Departement of Economics Princeton University,.
  5. Hali J. Edison & Ronald MacDonald, 2000. "Monetary policy independence in the ERM: was there any?," International Finance Discussion Papers 665, Board of Governors of the Federal Reserve System (U.S.).
  6. Thierry Roncalli & Jean-Sébastien Pentecôte, 1996. "Retour à la moyenne dans les cours du change du mécanisme de change européen : 1987-1995," Économie et Prévision, Programme National Persée, vol. 123(2), pages 189-205.
  7. Robert McCauley, 1999. "The Euro and the Dollar, 1998," Open Economies Review, Springer, vol. 10(1), pages 91-133, February.
  8. Hans Groeneveld, 1995. "Monetary Spill-over Effects in the ERM: The Case of Austria, a Former Shadow Member," Working Papers 20, Oesterreichische Nationalbank (Austrian Central Bank).
  9. Hali Edison & Ronald MacDonald, 2003. "Credibility and Interest Rate Discretion in the ERM," Open Economies Review, Springer, vol. 14(4), pages 351-368, October.
  10. Kasman, Adnan & Kirbas-Kasman, Saadet & Turgutlu, Evrim, 2008. "Monetary policy convergence of potential EMU accession countries: A cointegration analysis with shifting regimes," Economic Modelling, Elsevier, vol. 25(2), pages 340-350, March.
  11. R. Sean Craig, 1994. "Who will join EMU? Impact of the Maastricht convergence criteria on economic policy choice and performance," International Finance Discussion Papers 480, Board of Governors of the Federal Reserve System (U.S.).
  12. Johannes Groeneveld, 1998. "From the ERM with Love: Monetary Spillover Effects to Austria," Empirica, Springer, vol. 25(3), pages 331-345, January.

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