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Expected and Predicted Realignments: The FF/DM Exchange Rate during the EMS, 1979-93

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  • Rose, Andrew K
  • Svensson, Lars E O

Abstract

Expected rates of devaluation for the French franc/Deutsche mark exchange rate during the EMS are estimated using the 'drift adjustment' method. Exchange rates within the band display strong mean reversion. The adjustment term, the expected rate of depreciation within the band, is often of the same magnitude as interest rate differentials. Bilateral exchange rate limits towards other ERM currencies have a significant and sizeable effect on estimated expected rates of devaluation. The behavior of estimated expected rates of depreciation within the band accords fairly well with the theoretical model of Bertola and Svensson (1993). Estimated expected rates of devaluation to some extent predict actual realignments. Copyright 1995 by The editors of the Scandinavian Journal of Economics.

Suggested Citation

  • Rose, Andrew K & Svensson, Lars E O, 1995. " Expected and Predicted Realignments: The FF/DM Exchange Rate during the EMS, 1979-93," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(2), pages 173-200, June.
  • Handle: RePEc:bla:scandj:v:97:y:1995:i:2:p:173-200
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    Cited by:

    1. Soderlind, Paul & Svensson, Lars, 1997. "New techniques to extract market expectations from financial instruments," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 383-429, October.
    2. repec:onb:oenbwp:y:2004:i:1:b:1 is not listed on IDEAS
    3. Jesus Crespo Cuaresma & Balázs Égert & Ronald MacDonald, 2004. "Nonlinear Exchange Rate Dynamics in Target Zones," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 46-69.
    4. Arturo José Galindo, 1999. "a credibilidad de la banda cambiaria en Colombia: implicaciones sobre el diferencial de tasas de interés," COYUNTURA ECONÓMICA, FEDESARROLLO, June.
    5. Peter Carr & Zura Kakushadze, 2015. "FX Options in Target Zone," Papers 1512.01527, arXiv.org, revised Jul 2016.
    6. Darvas, Zsolt, 1999. "Az árfolyamsávok empirikus modelljei és a devizaárfolyam sávon belüli előrejelezhetetlensége
      [Empirical models of exchange rate target zones]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 507-529.
    7. Balduzzi, Pierluigi & Bertola, Giuseppe & Foresi, Silverio, 1997. "A model of target changes and the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 223-249, July.
    8. Galindo, Arturo J., 2000. "Estimating credibility in Colombia's exchange-rate target zone," Journal of Development Economics, Elsevier, vol. 63(2), pages 473-484, December.
    9. Bekaert, G.R.J. & Gray, S.F., 1997. "Target zones and exchange rates : An empirical investigation," Discussion Paper 1997-22, Tilburg University, Center for Economic Research.

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