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Expected Devaluation and Economic Fundamentals

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  • Alun H. Thomas

    (International Monetary Fund)

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    Abstract

    Recent incidents of exchange rate collapse have provoked interest in how much these events are determined by economic fundamentals. This paper considers whether interest rate differentials are appropriate measures of the risk of devaluation and whether this measure of devaluation risk reflects the movements of variables that capture internal and external balance. The paper finds that interest rate differentials reflect devaluation risk but that movements in fundamental variables in France and Italy have only a weak effect on devaluation risk. The most significant influence on devaluation risk is the position of the currency in its band in that the lower the exchange value of a currency is within the band, the greater is the perceived risk of devaluation.

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    Bibliographic Info

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

    Volume (Year): 41 (1994)
    Issue (Month): 2 (June)
    Pages: 262-285

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    Handle: RePEc:pal:imfstp:v:41:y:1994:i:2:p:262-285

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    Cited by:
    1. Marco LYRIO & Hans DEWACHTER, 1999. "Multiple Equilibria and the Credibility of the Brazilian "Crawling Peg", 1995-1998," Center for Economic Studies - Discussion papers ces9919, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
    2. Tronzano, Marco & Psaradakis, Zacharias & Sola, Martin, 2003. "Target zone credibility and economic fundamentals," Economic Modelling, Elsevier, vol. 20(4), pages 791-807, July.
    3. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.
    4. Ozkan, F. Gulcin, 2003. "Explaining ERM realignments: Insights from optimising models of currency crises," Journal of Macroeconomics, Elsevier, vol. 25(4), pages 491-507, December.
    5. Ribeiro de Castro, Claudia, 1999. "Inside and Outside the Band Exchange Rate Fluctuations for Brazil," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2000004, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    6. Amato, Amedeo & Tronzano, Marco, 2000. "Fiscal policy, debt management and exchange rate credibility: Lessons from the recent Italian experience," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 921-943, June.
    7. Bernhardsen, Tom, 2000. "The relationship between interest rate differentials and macroeconomic variables: a panel data study for European countries," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 289-308, April.
    8. 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.
    9. 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.).

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