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European Exchange Rate Credibility Before the Fall

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  • Rose, Andrew K
  • Svensson, Lars E O

Abstract

Realignment expectations which measure exchange rate credibility are analysed for European exchange rates using daily financial data since the inception of the EMS. It is difficult to find economically meaningful relationships between realignment expectations and macroeconomic variables, although there are signs that lower inflation improves credibility. Statistically, many movements to realignment expectations are common to ERM participants. There were few indications of poor ERM credibility before late August 1992; the dimensions of the currency crisis of September 1992 appear to have taken both policy-makers and private agents largely by surprise.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 852.

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Date of creation: Nov 1993
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Handle: RePEc:cpr:ceprdp:852

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Keywords: Currency Crisis; EMS; ERM; Expectations; Realignment;

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References

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  1. Lars E.O. Svensson, 1992. "Why Exchange Rate Bands? Monetary Independence in Spite of Fixed Exchange Rates," NBER Working Papers 4207, National Bureau of Economic Research, Inc.
  2. Zhaohui Chen & Alberto Giovannini, 1992. "Estimating Expected Exchange Rates Under Target Zones," NBER Working Papers 3955, National Bureau of Economic Research, Inc.
  3. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August.
  4. Kenneth A. Froot & Kenneth Rogoff, 1991. "The EMS, the EMU, and the Transition to a Common Currency," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 269-328 National Bureau of Economic Research, Inc.
  5. 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.
  6. Meese, Richard, 1990. "Currency Fluctuations in the Post-Bretton Woods Era," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 117-34, Winter.
  7. Barry Eichengreen & Charles Wyplosz, 1993. "The Unstable EMS," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 51-144.
  8. Froot, Kenneth A & Thaler, Richard H, 1990. "Foreign Exchange," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 179-92, Summer.
  9. Vincent Koen, 1991. "Testing the Credibility of the Belgian Hard Currency Policy," IMF Working Papers 91/79, International Monetary Fund.
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