Assessing Target Zone Credibility: Mean Reversion and Devaluation Expectations in the ERM 1979-1992
AbstractThe paper presents estimates of devaluation expectations for six EMS currencies relative to the Deutsche mark, for the period March 1979-May 1990. The estimation method is simple and operational, and consistently generates sensible results. The estimates are constructed by the adjusting interest rate differentials by subtracting estimated expected rates of depreciation within the exchange rate band. The adjustment is nontrivial because exchange rates within ERM bands display mean reversion rather than random walk (unit root) behavior. 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3795.
Date of creation: Jan 1994
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- Svensson, Lars E. O., 1993. "Assessing target zone credibility : Mean reversion and devaluation expectations in the ERM, 1979-1992," European Economic Review, Elsevier, vol. 37(4), pages 763-793, May.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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