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An empirical examination of exchange-rate credibility determinants in the EMS

  • Francisco Ledesma-Rodriguez
  • Jorge Perez-Rodriguez
  • Simon Sosvilla-Rivero

This study provides empirical evidence on the determinants of exchange rate credibility under the European Monetary System (EMS). To that end, it considers both economic variables and political factors using data of eight currencies participating in the Exchange Rate Mechanism, covering the complete EMS history (1979 to 1998). The results suggest that the level of international reserves, the real interest rate and right-wing governments would have positively affected the credibility of a given central parity, while the unemployment rate and the inflation rate would have negatively influenced such credibility.

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Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 13 (2006)
Issue (Month): 13 ()
Pages: 847-850

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Handle: RePEc:taf:apeclt:v:13:y:2006:i:13:p:847-850
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  1. Edin, Per-Anders & Vredin, Anders, 1993. "Devaluation Risk in Target Zones: Evidence from the Nordic Countries," Economic Journal, Royal Economic Society, vol. 103(416), pages 161-75, January.
  2. Kempa, Bernd & Nelles, Michael, 1999. " The Theory of Exchange Rate Target Zones," Journal of Economic Surveys, Wiley Blackwell, vol. 13(2), pages 173-210, April.
  3. Allan Drazen, 1999. "Political Contagion in Currency Crises," NBER Working Papers 7211, National Bureau of Economic Research, Inc.
  4. Bertola, Giuseppe & Caballero, Ricardo, 1990. "Target Zones and Realignments," CEPR Discussion Papers 398, C.E.P.R. Discussion Papers.
  5. Svensson, Lars E O, 1991. "The Simplest Test of Target Zone Credibility," CEPR Discussion Papers 493, C.E.P.R. Discussion Papers.
  6. Francisco Ledesma-Rodriguez & Manuel Navarro-Ibanez & Jorge Perez-Rodriguez & Simon Sosvilla-Rivero, 2005. "Assessing the credibility of a target zone: evidence from the EMS," Applied Economics, Taylor & Francis Journals, vol. 37(19), pages 2265-2287.
  7. Bertola, Giuseppe & Svensson, Lars E O, 1993. "Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 689-712, July.
  8. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
  9. Alogoskoufis, George & Lockwood, Ben & Philippopoulos, Apostolis, 1992. "Wage Inflation, Electoral Uncertainty and the Exchange Rate Regime: Theory and UK Evidence," CEPR Discussion Papers 657, C.E.P.R. Discussion Papers.
  10. Francisco Ledesma-Rodríguez & Manuel Navarro-Ibáñez & Jorge Pérez-Rodríguez & Simón Sosvilla-Rivero, 2003. "On the Credibility of a Target Zone: Evidence from the EMS," Economic Working Papers at Centro de Estudios Andaluces E2003/33, Centro de Estudios Andaluces.
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