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Assessing the credibility of a target zone: Evidence from the EMS

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

Abstract

In this paper we provide some new evidence on the credibility of the ERM. Our paper differs from the previous literature in three main respects. First, its main contribution is the use of several credibility indicators, some of them never been applied before to all the currencies under study. This allows to strengthen the results obtained in this paper. Second, we analyse a longer period than that considered in previous studies, covering the complete EMS history. Third, we have carried out a simple comparison of the prediction qualities of the different indicators, in order to explore their ability to capture the main ERM events. Our results suggest credibility gains for most of the currencies before the monetary turmoil in 1992, followed by generalised credibility losses. After the widening of the fluctuation bands, there is evidence of a gradual improvement in credibility. Finally, the marginal credibility measure seems to be the best credibility indicator to capture the main events in the EMS history.

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Paper provided by FEDEA in its series Working Papers with number 2001-04.

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Handle: RePEc:fda:fdaddt:2001-04

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Citations

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Cited by:
  1. Salvador Gil-Pareja & Simón Sosvilla-Rivero, . "Price Convergence in the European Car Market," Working Papers 2005-22, FEDEA.
  2. Simón Sosvilla-Rivero & Reyes Maroto Illera, 2002. "Regimen changes and duration in the European Monetary System," Working Papers 02-05, Asociación Española de Economía y Finanzas Internacionales.
  3. Francisco Ledesma-Rodriguez & Jorge Perez-Rodriguez & Simon Sosvilla-Rivero, 2006. "An empirical examination of exchange-rate credibility determinants in the EMS," Applied Economics Letters, Taylor and Francis Journals, vol. 13(13), pages 847-850.
  4. M. Frömmel, 2007. "Volatility Regimes in Central and Eastern European Countries’ Exchange Rates," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 07/487, Ghent University, Faculty of Economics and Business Administration.
  5. 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.
  6. A. Morales-Zumaquero & Simon Sosvilla-Rivero, 2008. "Macroeconomic instability in the European monetary system?," Applied Financial Economics, Taylor and Francis Journals, vol. 18(12), pages 965-983.
  7. Oscar Bajo-Rubio & Simón Sosvilla-Rivero & Fernando Fernández-Rodríguez, . "Non-Linear Forecasting Methods: Some Applications to the Analysis of Financial Series," Working Papers 2002-01, FEDEA.
  8. Francisco Pérez-Bermejo & Simón Sosvilla-Rivero, . "Currency Crises and Political Factors: Drawing Lessons from the EMS Experience," Working Papers 2004-04, FEDEA.
  9. Francisco Perez-Bermejo & Simon Sosvilla-Rivero & Reyes Maroto-Illera, 2007. "An eclectic approach to currency crises: drawing lessons from the EMS experience," Applied Financial Economics, Taylor and Francis Journals, vol. 18(6), pages 503-519.
  10. Simóm Sosvilla-Rivero & Reyes Maroto, . "Regimen duration in the EMR," Working Papers 2001-05, FEDEA.
  11. Fernando Fernández-Rodríguez & Christian González-Martel & Simón Sosvilla-Rivero, . "Optimisation of Technical Rules by Genetic Algorithms: Evidence from the Madrid Stock Market," Working Papers 2001-14, FEDEA.

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