Explaining Devaluation Expectations in the EMS
AbstractThis paper is an attempt to explain devaluation expectations in the ERM with macroeconomic fundamentals. Two different measures of devaluation expectations are used; expectations estimated using the drift-adjustment method of Bertola and Svensson  and the directly observable interest rate differential. The interest rate differential seems more closely connected to macroeconomic fundamentals than the estimates stemming from the drift- adjustment metod. For the ERM as a whole, an expanded theoretic model of exchange rate determination explains a considerable part of the devaluation expectations, whereas for individual countries additional variables are important, and the relationships are ambiguous and country specific.
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Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 20.
Length: 30 pages
Date of creation: Jun 1994
Date of revision:
Publication status: Published in Finnish Economic Papers, 1995, pages 63-81
Contact details of provider:
Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
Fax: +46-(0)8-31 01 57
Web page: http://www.hhs.se/
More information through EDIRC
Target zones; interest rates; realignments;
Other versions of this item:
- Ulf Söderström & Alexis Stenfors, 1995. "Explaining devaluation expectations in the EMS," Finnish Economic Papers, Finnish Economic Association, Finnish Economic Association, vol. 8(2), pages 63-81, Autumn.
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F31 - International Economics - - International Finance - - - Foreign Exchange
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.:
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"The Simplest Test of Target Zone Credibility,"
Papers, Stockholm - International Economic Studies
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"Target Zones and Exchange Rate Dynamics,"
NBER Working Papers
2481, National Bureau of Economic Research, Inc.
- Vincent Koen, 1991. "Testing the Credibility of the Belgian Hard Currency Policy," IMF Working Papers, International Monetary Fund 91/79, International Monetary Fund.
- Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(5), pages 829-53, October.
- Zhaohui Chen & Alberto Giovannini, 1992. "Estimating Expected Exchange Rates Under Target Zones," NBER Working Papers 3955, National Bureau of Economic Research, Inc.
- Larry Neal & Marc Weidenmier, 2002.
"Crises in the Global Economy from Tulips to Today: Contagion and Consequences,"
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9147, National Bureau of Economic Research, Inc.
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- Bernhardsen, Tom, 2000. "The relationship between interest rate differentials and macroeconomic variables: a panel data study for European countries," Journal of International Money and Finance, Elsevier, Elsevier, vol. 19(2), pages 289-308, April.
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