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Are the exchange rates of EMU candidate countries anchored by their expected euro locking rates?

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  • Anna Naszódi

    ()
    (Magyar Nemzeti Bank)

Abstract

This paper tests whether the exchange rates of the Czech koruna, the Hungarian forint, and the Polish zloty were anchored by market expectations concerning their euro locking rates. First, the process of the exchange rate is derived as a function of the following factors: (i) latent exchange rate, (ii) market expectations concerning locking rate, (iii) market expectations concerning locking date. Then, the locking dates and rates are filtered from historical exchange rates, currency option prices and yield curves. The main finding of the paper is that the relatively stable market expectations concerning the locking rates have substantially stabilized the three analyzed exchange rates.

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File URL: http://english.mnb.hu/Root/Dokumentumtar/MNB/Kiadvanyok/mnbhu_mnbfuzetek/mnbhu_WP2008_1/wp2008_1.pdf
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Bibliographic Info

Paper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Working Papers with number 2008/1.

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Length: 50 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:mnb:wpaper:2008/1

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Keywords: Monetary union; eurozone entry; factor model; Kalman filter; exchange rate stabilization; asset-pricing exchange rate model.;

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  1. Miller, Marcus & Sutherland, Alan, 1994. "Speculative Anticipations of Sterling's Return to Gold: Was Keynes Wrong?," Economic Journal, Royal Economic Society, vol. 104(425), pages 804-12, July.
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  8. Djajic, Slobodan, 1989. "Dynamics of the exchange rate in anticipation of pegging," Journal of International Money and Finance, Elsevier, vol. 8(4), pages 559-571, December.
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  12. De Grauwe, Paul & Dewachter, Hans & Veestraeten, Dirk, 1999. "Explaining Recent European Exchange-Rate Stability," International Finance, Wiley Blackwell, vol. 2(1), pages 1-31, April.
  13. Jeffrey A. Frankel & Kenneth A. Froot, 1985. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
  14. Balázs Égert, & László Halpern & Ronald MacDonald, 2005. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," William Davidson Institute Working Papers Series wp793, William Davidson Institute at the University of Michigan.
  15. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-22, September.
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