Assessing Target Zone Credibility: Mean Reversion and Devaluation Expectations in the EMS
AbstractThe paper presents estimates of devaluation expectations for six EMS currencies relative to the Deutschmark, for the period March 1979 - May 1990. The estimation method is simple and operational, and consistently generates sensible results. The estimates are constructed by adjusting interest rate differentials by subtracting estimated expected rates of depreciation within the exchange rate band. The adjustment is non-trivial because exchange rates within ERM bands display mean reversion rather than random walk (unit root) behaviour. The adjustment is essential since expected rates of depreciation within the band are usually of about the same magnitude as interest rate differentials.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 580.
Date of creation: Jul 1991
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Other versions of this item:
- Svensson, L.E., 1991. "Assessing Target Zone Credibility: Mean Reversion and Devaluation Expectations in the EMS," Papers 493, Stockholm - International Economic Studies.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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- Lindberg, H. & Svensson, L.E. & Soderlind, P., 1991.
"Devaluation Expectations: the Swedish Krona 1982-1991,"
495, Stockholm - International Economic Studies.
- Hans Lindberg & Lars E.O. Svensson & Paul Soderlind, 1991. "Devaluation Expectations: The Swedish Krona 1982-1991," NBER Working Papers 3918, National Bureau of Economic Research, Inc.
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- Zhaohui Chen & Alberto Giovannini, 1993. "The Determinants of Realignment Expectations Under the EMS: Some Empirical Regularities," NBER Working Papers 4291, National Bureau of Economic Research, Inc.
- Antoine Magnier, 1992. "Théorie des zones cibles et fonctionnement du SME," Économie et Prévision, Programme National Persée, vol. 104(3), pages 87-113.
- Gerlach, Stefan, 1995. "Adjustable pegs vs. single currencies: How valuable is the option to realign?," European Economic Review, Elsevier, vol. 39(6), pages 1155-1170, June.
- Knot, Klaas & de Haan, Jakob, 1995. "Interest rate differentials and exchange rate policies in Austria, The Netherlands, and Belgium," Journal of Banking & Finance, Elsevier, vol. 19(2), pages 363-386, May.
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