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Expected and Predicted Realignments: The FF/DM Exchange Rate during the EMS, 1979-93

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  • Rose, Andrew K
  • Svensson, Lars E O

Abstract

Expected rates of devaluation for the French franc/Deutsche mark exchange rate during the EMS are estimated using the 'drift adjustment' method. Exchange rates within the band display strong mean reversion. The adjustment term, the expected rate of depreciation within the band, is often of the same magnitude as interest rate differentials. Bilateral exchange rate limits towards other ERM currencies have a significant and sizeable effect on estimated expected rates of devaluation. The behavior of estimated expected rates of depreciation within the band accords fairly well with the theoretical model of Bertola and Svensson (1993). Estimated expected rates of devaluation to some extent predict actual realignments. Copyright 1995 by The editors of the Scandinavian Journal of Economics.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 97 (1995)
Issue (Month): 2 (June)
Pages: 173-200

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Handle: RePEc:bla:scandj:v:97:y:1995:i:2:p:173-200

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Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442

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Cited by:
  1. Soderlind, P & Svensson, L-E-O, 1996. "New Techniques to Extract Market Expectations from Financial Instruments," Papers 621, Stockholm - International Economic Studies.
  2. Balduzzi, Pierluigi & Bertola, Giuseppe & Foresi, Silverio, 1997. "A model of target changes and the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 223-249, July.
  3. repec:onb:oenbwp:y:2004:i:1:b:1 is not listed on IDEAS
  4. Darvas, Zsolt, 1999. "Az árfolyamsávok empirikus modelljei és a devizaárfolyam sávon belüli előrejelezhetetlensége
    [Empirical models of exchange rate target zones]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 507-529.

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