Political and institutional factors in regime change in the ERM: An application of duration analysis
AbstractThis paper analyses the functioning of the European Exchange Rate Mechanism (ERM). To that end, we apply duration models to estimate an augmented target-zone model, explicitly incorporating political and institutional factors into the explanation of European exchange rate policies. The estimations are based on quarterly data of eight currencies participating in the ERM, covering the complete history of the European Monetary System. Our results suggest that both economic and political factors are important determinants of the ERM currency policies. Concerning economic factors, the money supply, the real exchange rate, the interest in Germany and the central parity deviation would have negatively affected the duration of a given central parity, while credibility and the price level in Germany would have positively influenced such duration. Regarding political variables, elections, central bank independence and left-wing administrations would have increased the probability of maintaining the current regime, while unstable governments would have been associated with more frequent regime changes. Moreover, we show how the political augmented model outperforms, both in terms of explanatory power and goodness of fit, the model which just incorporates pure economic determinants.
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Bibliographic InfoPaper provided by Asociación Española de Economía y Finanzas Internacionales in its series Working Papers with number 07-05.
Length: 41 pages
Date of creation: Oct 2007
Date of revision:
Duration analysis; political variables; exchange rates; European Monetary System;
Other versions of this item:
- Simón Sosvilla-Rivero & Francisco Pérez-Bermejo, 2008. "Political and Institutional Factors in Regime Changes in the ERM: An Application of Duration Analysis," The World Economy, Wiley Blackwell, vol. 31(8), pages 1049-1077, 08.
- C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
- D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-19 (All new papers)
- NEP-CBA-2008-01-19 (Central Banking)
- NEP-IFN-2008-01-19 (International Finance)
- NEP-MAC-2008-01-19 (Macroeconomics)
- NEP-MON-2008-01-19 (Monetary Economics)
- NEP-POL-2008-01-19 (Positive Political Economics)
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