Chapter 5 European Exchange Rate Credibility: An Empirical Analysis

Purpose – The aim of this chapter is to study the determinants of realignment expectations (as a measure of the exchange rate credibility). Methodology/approach – To investigate this aspect, we apply a fixed effects model over the period 2001:01–2009:12 for a set of 14 European countries. Findings – Using monthly data since the introduction of the euro, the chapter finds that standard macroeconomic phenomena and financial crisis over the selected period exerted a significant and positive impact on European realignment expectations. We also provide evidence that the 2008 global financial crisis has a significant effect on realignment expectations. Originality/value of chapter – At our best knowledge, the single paper that studied a similar problem since the inception of the European Monetary System (EMS) in early 1979 was the research paper of Rose and Svensson (1993). Our findings are original in the sense that we find meaningful relationships between realignment expectations and financial crisis (systemic and nonsystemic crisis) and macroeconomic variables. Our research also wishes to contribute to the emergence of the recent studies on European exchange rate credibility.