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An empirical examination of exchange-rate credibility determinants in the EMS

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  • Francisco Ledesma-Rodríguez
  • Jorge Pérez-Rodríguez
  • Simón Sosvilla-Rivero

Abstract

This paper provides empirical evidence on the determinants of exchange rate credibility under the European Monetary System (EMS). To that end, we have considered both economic variables and political factors using data of eight currencies participating in the Exchange Rate Mechanism, covering the complete EMS history (1979-1998). Our results suggest that the level of international reserves, the real interest rate and right-wing governments would have positively affected the credibility of a given central parity, while the unemployment rate and the inflation rate would have negative influenced such credibility.

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Paper provided by FEDEA in its series Working Papers on International Economics and Finance with number 04-01.

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Handle: RePEc:fda:fdadef:04-01

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  1. Alogoskoufis, George S & Lockwood, Ben & Philippopoulos, Apostolis, 1992. "Wage Inflation, Electoral Uncertainty and the Exchange Rate Regime: Theory and UK Evidence," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 102(415), pages 1370-94, November.
  2. Giuseppe Bertola & Lars E.O. Svensson, 1991. "Stochastic Devaluation Risk and the Empirical Fit of Target Zone Models," NBER Working Papers 3576, National Bureau of Economic Research, Inc.
  3. Francisco Ledesma-Rodríguez & Manuel Navarro-Ibáñez & Jorge Pérez-Rodríguez & Simón Sosvilla-Rivero, . "Assessing the credibility of a target zone: Evidence from the EMS," Working Papers 2001-04, FEDEA.
  4. Svensson, L.E.O., 1990. "The Simplest Test of Target Zone Credibility," Papers, Stockholm - International Economic Studies 469, Stockholm - International Economic Studies.
  5. Francisco Ledesma-Rodríguez & Manuel Navarro-Ibáñez & Jorge Pérez-Rodríguez & Simón Sosvilla-Rivero, 2003. "On the Credibility of a Target Zone: Evidence from the EMS," Economic Working Papers at Centro de Estudios Andaluces, Centro de Estudios Andaluces E2003/33, Centro de Estudios Andaluces.
  6. Bertola, Giuseppe & Caballero, Ricardo J, 1992. "Target Zones and Realignments," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 520-36, June.
  7. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(3), pages 669-82, August.
  8. Allan Drazen, 1999. "Political Contagion in Currency Crises," NBER Working Papers 7211, National Bureau of Economic Research, Inc.
  9. Kempa, Bernd & Nelles, Michael, 1999. " The Theory of Exchange Rate Target Zones," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 13(2), pages 173-210, April.
  10. Edin, Per-Anders & Vredin, Anders, 1993. "Devaluation Risk in Target Zones: Evidence from the Nordic Countries," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 103(416), pages 161-75, January.
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