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Exchange Rate Dynamics and Currency Unification: The Ostmark-DM Rate

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  • Burda, Michael C
  • Gerlach, Stefan

Abstract

This paper studies the exchange rate between the East and West German mark in the period before German monetary union. We show that standard exchange rate theory contains strong predictions about the dynamics of the exchange rate under these circumstances, and we use state-space methods to estimate key parameters of the model. A random-walk model gives a good fit to the first half of the data, during which it was unclear that monetary union would occur. In the second half, when union was expected, the Ostmark rate behaves as a weighted average of fundamentals and the expected terminal exchange rate.

Suggested Citation

  • Burda, Michael C & Gerlach, Stefan, 1990. "Exchange Rate Dynamics and Currency Unification: The Ostmark-DM Rate," CEPR Discussion Papers 485, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:485
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    Cited by:

    1. Hans Dewachter & Dirk Veestraeten, 1999. "Measuring Convergence Speed of Asset Prices Toward a Pre-Announced Target," Working Papers of Department of Economics, Leuven ces9902, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    2. Frait, Jan & Komarek, Lubos & Meleck, Martin, 2006. "The Real Exchange Rate Misalignment in the Five Central European Countries," The Warwick Economics Research Paper Series (TWERPS) 739, University of Warwick, Department of Economics.
    3. Naszodi, Anna, 2010. "Testing the asset pricing model of exchange rates with survey data," Working Paper Series 1200, European Central Bank.
    4. Bronka Rzepkowski, 1997. "Impact de l'annonce de la modalité de fixation des taux de conversion des monnaies européennes," Économie et Prévision, Programme National Persée, vol. 128(2), pages 145-159.

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