Assessing target zone credibility : Mean reversion and devaluation expectations in the ERM, 1979-1992
AbstractThe paper presents estimates of devaluation expectations for six EMS currencies relative to the Deutsche mark, for the period March 1979-May 1990. The estimation method is simple and operational, and consistently generates sensible results. The estimates are constructed by the adjusting interest rate differentials by subtracting estimated expected rates of depreciation within the exchange rate band. The adjustment is nontrivial because exchange rates within ERM bands display mean reversion rather than random walk (unit root) behavior. The adjustment is essential since expected rates of depreciation within the band are usually of about the same magnitude as interest rate differentials.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal European Economic Review.
Volume (Year): 37 (1993)
Issue (Month): 4 (May)
Contact details of provider:
Web page: http://www.elsevier.com/locate/eer
Other versions of this item:
- Lars E.O. Svensson, 1994. "Assessing Target Zone Credibility: Mean Reversion and Devaluation Expectations in the ERM 1979-1992," NBER Working Papers 3795, National Bureau of Economic Research, Inc.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Flood, Robert P. & Rose, Andrew K. & Mathieson, Donald J., 1991.
"An empirical exploration of exchange-rate target-zones,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 35(1), pages 7-65, January.
- Robert P. Flood & Andrew K. Rose & Donald J. Mathieson, 1990. "An Empirical Exploration of Exchange Rate Target-Zones," NBER Working Papers 3543, National Bureau of Economic Research, Inc.
- Donald J. Mathieson & Robert P. Flood & Andrew K. Rose, 1991. "An Empirical Exploration of Exchange Rate Target-Zones," IMF Working Papers 91/15, International Monetary Fund.
- Perron, P, 1988.
"The Great Crash, The Oil Price Shock And The Unit Root Hypothesis,"
338, Princeton, Department of Economics - Econometric Research Program.
- Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
- Svensson, Lars E. O., 1992.
"The foreign exchange risk premium in a target zone with devaluation risk,"
Journal of International Economics,
Elsevier, vol. 33(1-2), pages 21-40, August.
- Svensson, L.E., 1990. "The Foreign Exchange Risk Premium in a Target Zone with Devaluation Risk," Papers 475, Stockholm - International Economic Studies.
- Svensson, Lars E O, 1991. "The Foreign Exchange Risk Premium in a Target Zone with Devaluation Risk," CEPR Discussion Papers 494, C.E.P.R. Discussion Papers.
- Lars E.O. Svensson, 1990. "The Foreign Exchange Risk Premium in a Target Zone with Devaluation Risk," NBER Working Papers 3466, National Bureau of Economic Research, Inc.
- Bodnar, G., 1991. "Target Zones and Euro-Rates: A Model of Eurocurrency Interest Rate Differentials in the European Monetary System," Papers 91-03, Rochester, Business - General.
- Phillips, P C B, 1987.
"Time Series Regression with a Unit Root,"
Econometric Society, vol. 55(2), pages 277-301, March.
- Tom Doan, . "PPUNIT: RATS procedure to perform Phillips-Perron Unit Root test," Statistical Software Components RTS00160, Boston College Department of Economics.
- Peter C.B. Phillips, 1985. "Time Series Regression with a Unit Root," Cowles Foundation Discussion Papers 740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
- repec:fth:coluec:460 is not listed on IDEAS
- 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.).
- Rose, Andrew K & Svensson, Lars E O, 1991. "Expected and Predicted Realignments: The FF/DM Exchange Rate During the EMS," CEPR Discussion Papers 552, C.E.P.R. Discussion Papers.
- Rose, A.K. & Svensson, L.E., 1991. "Expected and Predicted Realignments: the FF/DM Exchange Rate during the EMS," Papers 485, Stockholm - International Economic Studies.
- Andrew K. Rose & Lars E.O. Svensson, 1995. "Expected and Predicted Realignments: The FF/DM Exchange Rate During the EMS," NBER Working Papers 3685, National Bureau of Economic Research, Inc.
- Bertola, G. & Cabarello, R.J., 1990.
"Target Zones And Realignments,"
1990_51, Columbia University, Department of Economics.
- Owen Evens & Thomas H. Mayer & Philip M. Young & Horst Ungerer, 1986. "The European Monetary System: Recent Developments," IMF Occasional Papers 48, International Monetary Fund.
- Bartolini, Leonardo & Bodnar, Gordon M., 1992.
"Target zones and forward rates in a model with repeated realignments,"
Journal of Monetary Economics,
Elsevier, vol. 30(3), pages 373-408, December.
- Gordon M. Bodnar & Leonardo Bartolini, 1992. "Target Zones and Forward Rates In a Model with Repeated Realignments," IMF Working Papers 92/22, International Monetary Fund.
- Alberto Giovannini, 1990. "European Monetary Reform: Progress and Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 217-292.
- Froot, Kenneth A & Thaler, Richard H, 1990. "Foreign Exchange," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 179-92, Summer.
- Viktors Ajevskis & Armands Pogulis, 2005. "Repegging of the Lats to the Euro: Implications for the Financial Sector," Working Papers 2005/01, Latvijas Banka.
- Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.
- Stefan Gerlach & Frank Smets, 1997.
"Exchange rate regimes and the expectations hypothesis of the term structure,"
BIS Working Papers
43, Bank for International Settlements.
- Gerlach, Stefan & Smets, Frank, 1997. "Exchange Rate Regimes and the Expectations Hypothesis of the Term Structure," CEPR Discussion Papers 1752, C.E.P.R. Discussion Papers.
- Viktors Ajevskis & Armands Pogulis & Gunars Berzins, 2004. "Foreign Exchange and Money Markets in the Context of the Exchange Rate Target Zone," Working Papers 2004/01, Latvijas Banka.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wendy Shamier).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.