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Exchange Rate Commitments and Forward Rate Unbiasedness. Further Evidence from EMS Data

Author

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  • Tronzano , Marco

    (Università degli Studi di Genova, Dipartimento di Economia e Metodi Quantitativi)

Abstract

This paper addresses an interesting theoretical intuition, originally put forward in De Grauwe (1989), according to which market efficiency should find stronger support in a pegged exchange rate regime rather than in a purely floating context. To this purpose, we extend to a selected group of long term EMS currencies the empirical investigation carried out in Tronzano (2002). As revealed by cointegration tests, a formal exchange rate commitment exerts a significant positive effect on market efficiency, although the above result cannot be generalized to all EMS currencies. Whenever the credibility of a target zone is relatively low, the link between macroeconomic fundamentals and the exchange rate becomes highly uncertain, giving rise to a time-varying risk premium component invalidating forward rate unbiasedness. This evidence has relevant policy implications on some reform proposals of the international monetary system which aim at preventing large exchange rate misalignments among the leading world currencies.

Suggested Citation

  • Tronzano , Marco, 2003. "Exchange Rate Commitments and Forward Rate Unbiasedness. Further Evidence from EMS Data," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 56(1), pages 83-118.
    • Handle: RePEc:ris:ecoint:0169
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    More about this item

    Keywords

    Market Efficiency; Forward Rate Unbiasedness; Cointegration; EMS; Target Zones; International Monetary System;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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