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French-German Interest Rate Differentials and Time-Varying Realignment Risk

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  • Francesco Caramazza

    (International Monetary Fund)

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    Abstract

    This paper explores the determinants of realignment expectations for the French franc--deutsche mark exchange rate. Expected changes in the central parity are estimated by adjusting short-term Euromarket interest rate differentials for the expected rate of change in the exchange rate within the ERM fluctuation band and by the yield differential on long-term government bonds. The results indicate that the exchange rate within the band is mean reverting and that expected changes are sizable. Realignment expectations are found to be related to the evolution of fundamental economic variables and, for shorter horizons, the position of the franc in the fluctuation band.

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

    Volume (Year): 40 (1993)
    Issue (Month): 3 (September)
    Pages: 567-583

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    Handle: RePEc:pal:imfstp:v:40:y:1993:i:3:p:567-583

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    Cited by:
    1. Peria, Maria Soledad Martinez, 1999. "A regime - switching approach to studying speculative attacks : focus on European Monetary System crises," Policy Research Working Paper Series 2132, The World Bank.
    2. repec:ebl:ecbull:v:5:y:2007:i:6:p:1-14 is not listed on IDEAS
    3. Andrea Cipollini & Kostas Mouratidis & Nicola Spagnolo, 2008. "Evaluating currency crises: the case of the European monetary system," Empirical Economics, Springer, vol. 35(1), pages 11-27, August.
    4. Jerome Henry & Jens Weidmann, 2005. "The French-German Interest Rate Differential Since German," International Finance 0503009, EconWPA.
    5. Michael D. Bordo & Ronald MacDonald & Michael J. Oliver, 2009. "Sterling in crisis: 1964-1967," NBER Working Papers 14657, National Bureau of Economic Research, Inc.
    6. Brissimis, Sophocles N. & Sideris, Dimitris A. & Voumvaki, Fragiska K., 2005. "Testing long-run purchasing power parity under exchange rate targeting," Journal of International Money and Finance, Elsevier, vol. 24(6), pages 959-981, October.
    7. Pierre Siklos & Rod Tarajos, 1996. "Fundamentals and devaluation expectations in target zones: Some new evidence from the ERM," Open Economies Review, Springer, vol. 7(1), pages 35-59, January.
    8. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.
    9. Chen, Zhaohui & Giovannini, Alberto, 1997. "The determinants of realignment expectations under the EMS: Some empirical regularities," European Economic Review, Elsevier, vol. 41(9), pages 1687-1707, December.
    10. Olivier Jeanne, 1996. "Les modèles de crise de change : un essai de synthèse en relation avec la crise du franc de 1992-1993," Économie et Prévision, Programme National Persée, vol. 123(2), pages 147-162.

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