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A Note on Volatility Tradeoffs in the European Exchange Rate Mechanism

Author

Listed:
  • Christos I. Giannikos

    (City University of New York, Baruch College and Graduate Center)

  • Andreas Kakolyris

    (College of Business and Public Management, Department of Accounting and Finance)

  • Tin Shan Michael Suen

    (College of Business and Public Management, Department of Accounting and Finance)

  • Veysel Yucetepe

    (College of Business and Public Management, Kean University, Department of Marketing, Global Business and Economics)

Abstract

The study empirically examined the tradeoffs between the volatility of the exchange rate target zones and the volatility of nominal interest rate differentials. While the adoption of exchange rate regimes has declined over the past decades, their utilization still endures. A notable example is the European exchange rate mechanism, which now serves as an intermediary stage for new member states on their path to Euro adoption. The revived literature on this topic underscores the need for empirical support for volatility tradeoffs. The longstanding exchange rate mechanism offers a good opportunity for empirically testing these tradeoffs. The results using pooled regression on data drawn primarily from Bloomberg Terminal, covering 1984 to 2022 and including from various countries that participated in the exchange rate mechanism over the course of recent decades, confirm the results of some theoretical studies. Specifically, a policy seeking to narrow the exchange rate fluctuation margins leads to a decrease in the volatility of both the exchange rate and the interest rate differential.

Suggested Citation

  • Christos I. Giannikos & Andreas Kakolyris & Tin Shan Michael Suen & Veysel Yucetepe, 2025. "A Note on Volatility Tradeoffs in the European Exchange Rate Mechanism," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 31(4), pages 273-280, November.
    • Handle: RePEc:kap:iaecre:v:31:y:2025:i:4:d:10.1007_s11294-025-09941-5
    DOI: 10.1007/s11294-025-09941-5
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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