Assessing Target Zone Credibility: Mean Reversion and Devaluation Expectations in the EMS
AbstractThe paper presents estimates of devaluation expectations for six EMS currencies relative to the Deutschmark, for the period March 1979 - May 1990. The estimation method is simple and operational, and consistently generates sensible results. The estimates are constructed by adjusting interest rate differentials by subtracting estimated expected rates of depreciation within the exchange rate band. The adjustment is non-trivial because exchange rates within ERM bands display mean reversion rather than random walk (unit root) behaviour. The adjustment is essential since expected rates of depreciation within the band are usually of about the same magnitude as interest rate differentials.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 91/96.
Date of creation: 01 Oct 1991
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Postal: International Monetary Fund, Washington, DC USA
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Other versions of this item:
- Svensson, Lars E O, 1991. "Assessing Target Zone Credibility: Mean Reversion and Devaluation Expectations in the EMS," CEPR Discussion Papers 580, C.E.P.R. Discussion Papers.
- Svensson, L.E., 1991. "Assessing Target Zone Credibility: Mean Reversion and Devaluation Expectations in the EMS," Papers 493, Stockholm - International Economic Studies.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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- Zhaohui Chen & Alberto Giovannini, 1992. "Estimating Expected Exchange Rates Under Target Zones," NBER Working Papers 3955, National Bureau of Economic Research, Inc.
- Gerlach, Stefan, 1995. "Adjustable pegs vs. single currencies: How valuable is the option to realign?," European Economic Review, Elsevier, vol. 39(6), pages 1155-1170, June.
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- Antoine Magnier, 1992. "Théorie des zones cibles et fonctionnement du SME," Économie et Prévision, Programme National Persée, vol. 104(3), pages 87-113.
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