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Assensing the Credibility of the Irish Pound in the European Monetary System

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Author Info
Francisco Ledesma-Rodríguez
Manuel Navarro-Ibáñez
Jorge Pérez-Rodríguez
Simón Sosvilla-Rivero

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Abstract

In this paper we present new insights in the literature on the credibility of the Irish pound in the European Monetary System (EMS), adding value to the previous research, which has focused either on the correlation between Irish interest rates and Irish pound/Pound sterling exchange rate (therefore examining the credibility in an indirect way) or on the traditional credibility indicators. In contrast, we try to to provide some additional evidence making use of a wider set of credibility indicators, including the marginal credibility that has not been examined before for the Irish case. At the same time, we extend the analysis by considering in our sample the more recent events in the EMS history, particularly the broadening of fluctuation bands in 1993. Our results suggest credibility gains (i) after the realignments of the Irish pound on 4 August 1986, on 12 January 1987 and on 1 February 1993; (ii) after the broadening of the fluctuation bands to ± 15% on 2 August 1993; and (iii) around the devaluation of the Spanish peseta and the Portuguese escudo on 6 March 1995. On the other hand, we detect some occasional reductions in credibility, notably before the monetary turmoil registered in September 1992 and after the Italian lira rejoined the Exchange Rate Mechanism on 25 November 1996.

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Paper provided by FEDEA in its series Working Papers with number 2000-14.

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Handle: RePEc:fda:fdaddt:2000-14

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  1. Weber, A.A., 1991. "EMS Credibility," Papers 9103, Tilburg - Center for Economic Research.
  2. Honohan, Patrick & Conroy, Charles, 1994. "Irish Interest Rate Fluctuations in The European Monetary System," Research Series, Economic and Social Research Institute (ESRI), number GRS165.
  3. Rose, Andrew K. & Svensson, Lars E. O., 1994. "European exchange rate credibility before the fall," European Economic Review, Elsevier, vol. 38(6), pages 1185-1216, June. [Downloadable!] (restricted)
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  4. Bryon Higgins, 1993. "Was the ERM crisis inevitable?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 27-40. [Downloadable!]
  5. Svensson, Lars E. O., 1992. "The foreign exchange risk premium in a target zone with devaluation risk," Journal of International Economics, Elsevier, vol. 33(1-2), pages 21-40, August. [Downloadable!] (restricted)
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  6. Bertola, Giuseppe & Svensson, Lars E O, 1993. "Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models," Review of Economic Studies, Blackwell Publishing, vol. 60(3), pages 689-712, July. [Downloadable!] (restricted)
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  7. James J. Heckman, 1976. "The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 120-137 National Bureau of Economic Research, Inc. [Downloadable!]
  8. Bertola, Giuseppe & Caballero, Ricardo J, 1992. "Target Zones and Realignments," American Economic Review, American Economic Association, vol. 82(3), pages 520-36, June. [Downloadable!] (restricted)
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  9. Walsh, Brendan, 1993. "Credibility, Interest Rates and the ERM: The Irish Experience," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(4), pages 439-52, November.
  10. Svensson, Lars E O, 1991. "The Simplest Test of Target Zone Credibility," CEPR Discussion Papers 493, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Sosvilla-Rivero, Simon & Fernandez-Rodriguez, Fernando & Bajo-Rubio, Oscar, 1999. "Exchange Rate Volatility in the EMS before and after the Fall," Applied Economics Letters, Taylor and Francis Journals, vol. 6(11), pages 717-22, November. [Downloadable!] (restricted)
  12. Gomez-Puig, Marta & Montalvo, JoseG., 1997. "A new indicator to assess the credibility of the EMS," European Economic Review, Elsevier, vol. 41(8), pages 1511-1535, August. [Downloadable!] (restricted)
  13. Rudiger Dornbusch, 1989. "Credibility, Debt and Unemployment: Ireland's Failed Stabilization," NBER Working Papers 2785, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Darvas, Zsolt, 1998. "Spurious Correlation in Exchange Rate Target Zone Modelling: Testing the Drift Adjustment Method on the US Dollar, Random Walk and Chaos," CEPR Discussion Papers 1890, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  15. Edin, Per-Anders & Vredin, Anders, 1993. "Devaluation Risk in Target Zones: Evidence from the Nordic Countries," Economic Journal, Royal Economic Society, vol. 103(416), pages 161-75, January. [Downloadable!] (restricted)
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  16. Leonardo Bartolini, 1993. "Devaluation and Competitiveness in a Small Open Economy - Ireland 1987-1993," IMF Working Papers 93/82, International Monetary Fund.
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