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Devaluation Expectations: The Swedish Krona 1982-1991

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  • Hans Lindberg
  • Lars E.O. Svensson
  • Paul Soderlind

Abstract

Devaluation expectations for the Swedish krona are estimated for the period 1982-1991 with several methods. First the "simplest test" is applied under either only the minimal assumption of "no positive minimum profit" or the additional assumption of uncovered interest parity. Then a more precise method suggested by Bertola and Svensson is used, in which expected rates of depreciation within the exchange rate band, estimated in several ways, are subtracted from interest rate differentials. In addition the probability density of the time of devaluations is estimated. Finally, estimated devaluation expectations are to some extent explained by a few macrovariables and parliament elections.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3918.

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Date of creation: Nov 1991
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Publication status: published as Economic Journal. vol. 103, pp. 1170-1179, (1993)
Handle: RePEc:nbr:nberwo:3918

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  1. Svensson, Lars E O, 1991. "Assessing Target Zone Credibility: Mean Reversion and Devaluation Expectations in the EMS," CEPR Discussion Papers, C.E.P.R. Discussion Papers 580, C.E.P.R. Discussion Papers.
  2. Rose, A.K. & Svensson, L.E., 1991. "Expected and Predicted Realignments: the FF/DM Exchange Rate during the EMS," Papers, Stockholm - International Economic Studies 485, Stockholm - International Economic Studies.
  3. 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.
  4. Froot, Kenneth A & Thaler, Richard H, 1990. "Foreign Exchange," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 4(3), pages 179-92, Summer.
  5. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  6. Peter C.B. Phillips, 1985. "Time Series Regression with a Unit Root," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
  7. Flood, Robert P. & Rose, Andrew K. & Mathieson, Donald J., 1991. "An empirical exploration of exchange-rate target-zones," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 35(1), pages 7-65, January.
  8. Svensson, Lars E O, 1991. "The Foreign Exchange Risk Premium in a Target Zone with Devaluation Risk," CEPR Discussion Papers, C.E.P.R. Discussion Papers 494, C.E.P.R. Discussion Papers.
  9. Lars E. O. Svensson, 1991. "Assessing Target Zone Credibility," IMF Working Papers 91/96, International Monetary Fund.
  10. Lars E.O. Svensson, 1990. "The Simplest Test of Target Zone Credibility," NBER Working Papers 3394, National Bureau of Economic Research, Inc.
  11. Weber, Axel A, 1991. "Stochastic Process Switching and Intervention in Exchange Rate Target Zones: Empirical Evidence from the EMS," CEPR Discussion Papers, C.E.P.R. Discussion Papers 554, C.E.P.R. Discussion Papers.
  12. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, Elsevier, vol. 31(3), pages 307-327, April.
  13. Bodnar, G., 1991. "Target Zones and Euro-Rates: A Model of Eurocurrency Interest Rate Differentials in the European Monetary System," Papers, Rochester, Business - General 91-03, Rochester, Business - General.
  14. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, Econometric Society, vol. 57(6), pages 1361-1401, November.
  15. Gordon M. Bodnar & Leonardo Bartolini, 1992. "Target Zones and Forward Rates in a Model with Repeated Realignments," IMF Working Papers 92/22, International Monetary Fund.
  16. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  17. Jeffrey Frankel & Steven Phillips, 1991. "The European Monetary System: Credible at Last?," NBER Working Papers 3819, National Bureau of Economic Research, Inc.
  18. Edin, P.A. & Vredin, A., 1991. "Devaluation Risk in Target Zones: Evidence from the Nordic Countries," Papers, Uppsala - Working Paper Series 1991g, Uppsala - Working Paper Series.
  19. Lindberg, H. & Soderlind, P., 1991. "Testing the Basic Target Zone Model on Swedish Data," Papers, Stockholm - International Economic Studies 488, Stockholm - International Economic Studies.
  20. Bertola, Giuseppe & Caballero, Ricardo, 1990. "Target Zones and Realignments," CEPR Discussion Papers, C.E.P.R. Discussion Papers 398, C.E.P.R. Discussion Papers.
  21. Francis X. Diebold & James M. Nason, 1989. "Nonparametric exchange rate prediction?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 81, Board of Governors of the Federal Reserve System (U.S.).
  22. repec:fth:coluec:460 is not listed on IDEAS
  23. Lindbecg, H. Soderlind, P., 1992. "Target Zone Models and the Intervention Policy; The Swedish Case," Papers, Stockholm - International Economic Studies 496, Stockholm - International Economic Studies.
  24. Alberto Giovannini, 1990. "European Monetary Reform: Progress and Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 217-292.
  25. Axel A. Weber, 1991. "Stochastic Process Switching and Intervention in Exchange Rate Target Zones: Empirical Evidence from the EMS," Volkswirtschaftliche Diskussionsbeiträge, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht 20-91, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
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Citations

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Cited by:
  1. Bernard Dumas & L. Peter Jennergren & Bertil Naslund, 1993. "Realignment Risk and Currency Option Pricing in Target Zones," NBER Working Papers 4458, National Bureau of Economic Research, Inc.
  2. Beetsma, R.M.W.J., 1992. "Imperfect credibility of the band and risk premia in the European Monetary System," Discussion Paper, Tilburg University, Center for Economic Research 1992-54, Tilburg University, Center for Economic Research.
  3. Pierluigi Balduzzi & Giuseppe Bertola & Silverio Foresi, 1993. "A Model of Target Changes and the Term Structure of Interest Rates," NBER Working Papers 4347, National Bureau of Economic Research, Inc.
  4. Svensson, Lars E O, 1992. "Why Exchange Rate Bands? Monetary Independence in Spite of Fixed Exchange Rates," CEPR Discussion Papers, C.E.P.R. Discussion Papers 742, C.E.P.R. Discussion Papers.
  5. Rose, Andrew K. & Svensson, Lars E. O., 1994. "European exchange rate credibility before the fall," European Economic Review, Elsevier, Elsevier, vol. 38(6), pages 1185-1216, June.
  6. Marianne Nessen, 1997. "Exchange Rate Expectations, the Forward Exchange Rate Bias and Risk Premia in Target Zones," Open Economies Review, Springer, Springer, vol. 8(2), pages 99-136, April.
  7. Zhaohui Chen & Alberto Giovannini, 1992. "Estimating Expected Exchange Rates Under Target Zones," NBER Working Papers 3955, National Bureau of Economic Research, Inc.
  8. Ribeiro de Castro, Claudia, 1999. "Inside and Outside the Band Exchange Rate Fluctuations for Brazil," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2000004, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

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