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European monetary arrangements: implications for the dollar, exchange rate variability and credibility

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Author Info
Hali J. Edison
Linda S. Kole

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Abstract

This paper uses the recent history of the ERM to gain insights into what might happen to exchange rates on the road to EMU. To do this, the paper examines the variability of exchange rates, the transmission of monetary policy between countries, the role of the dollar in ERM exchange rate crises, and ERM members' credibility as measured by the realignment probabilities prior to the September 1992 crisis. We find that behavior of exchange rates has changed over time and differs between ERM and non-ERM currencies. We identify two factors that might have contributed to the September 1992 crisis: high German interest rates and weakness of the U.S. dollar.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 468.

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Date of creation: 1994
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Handle: RePEc:fip:fedgif:468

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Keywords: European Monetary System (Organization) ; Foreign exchange rates ; Dollar; American;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Diebold, Francis X & Husted, Steven & Rush, Mark, 1991. "Real Exchange Rates under the Gold Standard," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1252-71, December. [Downloadable!] (restricted)
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  2. Hali J. Edison & Joseph E. Gagnon & William R. Melick, 1994. "Understanding the empirical literature on purchasing power parity: the post-Bretton Woods era," International Finance Discussion Papers 465, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  3. 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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  4. Neumann, Manfred J.M. & von Hagen, Jürgen, 1992. "Real Exchange Rates Within and Between Currency Areas: How Far Away is EMU?," CEPR Discussion Papers 660, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Jeff Frankel, Steve Phillips, and Menzie Chinn., 1992. "Financial and Currency Integration in the European Monetary System: The Statistical Record," Center for International and Development Economics Research (CIDER) Working Papers C92-005, University of California at Berkeley. [Downloadable!]
  6. Edison, Hali J. & Fisher, Eric O'N, 1991. "A long-run view of the European monetary system," Journal of International Money and Finance, Elsevier, vol. 10(1), pages 53-70, March. [Downloadable!] (restricted)
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  7. Katsimbris, George M & Miller, Stephen M, 1993. "Interest Rate Linkages within the European Monetary System: Further Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(4), pages 771-79, November. [Downloadable!] (restricted)
  8. Bertola, Giuseppe & Svensson, Lars E O, 1991. "Stochastic Devaluation Risk and the Empirical Fit of Target Zone Models," CEPR Discussion Papers 513, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Giavazzi, Francesco & Spaventa, Luigi, 1990. "The `New' EMS," CEPR Discussion Papers 369, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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    • Francesco Giavazzi & Luigi Spaventa, 1990. "The "New" EMS," Working Papers 86, Dipartimento Scienze Economiche, Universita' di Bologna.
  10. Kremers, Jeroen J M & Ericsson, Neil R & Dolado, Juan J, 1992. "The Power of Cointegration Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 325-48, August.
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  11. Mark P. Taylor & Michael J. Artis, 1993. "The Stabilizing Effect of the ERM on Exchange Rates and Interest Rates - An Empirical Investigation," IMF Working Papers 93/67, International Monetary Fund.
  12. Hagen, Jurgen von & Fratianni, Michele, 1990. "German dominance in the EMS: evidence from interest rates," Journal of International Money and Finance, Elsevier, vol. 9(4), pages 358-375, December. [Downloadable!] (restricted)
  13. Mizrach, Bruce, 1995. "Target zone models with stochastic realignments: an econometric evaluation," Journal of International Money and Finance, Elsevier, vol. 14(5), pages 641-657, October. [Downloadable!] (restricted)
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  14. Lindberg, Hans & Soderlind, Paul & Svensson, Lars E O, 1993. "Devaluation Expectations: The Swedish Krona 1985-92," Economic Journal, Royal Economic Society, vol. 103(420), pages 1170-79, September. [Downloadable!] (restricted)
  15. Giavazzi, Francesco & Pagano, Marco, 1988. "The advantage of tying one's hands : EMS discipline and Central Bank credibility," European Economic Review, Elsevier, vol. 32(5), pages 1055-1075, June. [Downloadable!] (restricted)
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  16. 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. [Downloadable!] (restricted)
  17. Chen, Zhaohui & Giovannini, Alberto, 1993. "The Determinants of Realignment Expectations Under the EMS - Some Empirical Regularities," CEPR Discussion Papers 790, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Johannes Groeneveld, 1998. "From the ERM with Love: Monetary Spillover Effects to Austria," Empirica, Springer, vol. 25(3), pages 331-345, January. [Downloadable!] (restricted)
  2. Christopher J. Neely, 1994. "Realignments of target zone exchange systems: what do we know?," Working Papers 1994-020, Federal Reserve Bank of St. Louis. [Downloadable!]
  3. Hali Edison & Ronald MacDonald, 2003. "Credibility and Interest Rate Discretion in the ERM," Open Economies Review, Springer, vol. 14(4), pages 351-368, October. [Downloadable!] (restricted)
  4. Michael Y. Hu & Christine X. Jiang & Christos Tsoukalas, 2004. "The volatility impact of the European monetary system on member and non-member currencies," Applied Financial Economics, Taylor and Francis Journals, vol. 14(5), pages 313-325, March. [Downloadable!] (restricted)
  5. Hans Groeneveld, 1995. "Monetary spill-over effects in the ERM: The case of Austria, a former shadow member," Working Papers 20, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
  6. Hali J. Edison & Ronald MacDonald, 2000. "Monetary policy independence in the ERM: was there any?," International Finance Discussion Papers 665, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  7. Kenen, Peter B., 1998. "EMU and Transatlantic Economic Relations," Discussion Paper Series 26164, Hamburg Institute of International Economics. [Downloadable!]
  8. Robert McCauley, 1999. "The Euro and the Dollar, 1998," Open Economies Review, Springer, vol. 10(1), pages 91-133, February. [Downloadable!] (restricted)
  9. Vuyyuri, S., 2004. "Linkages of Indian Interest Rates with US and Japanese Rates," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 4(2). [Downloadable!]
  10. R. Sean Craig, 1994. "Who will join EMU? Impact of the Maastricht convergence criteria on economic policy choice and performance," International Finance Discussion Papers 480, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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