French-German Interest Rate Differentials and Time-Varying Realignment Risk
AbstractThis 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 InfoArticle provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.
Volume (Year): 40 (1993)
Issue (Month): 3 (September)
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- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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