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Regimen changes and duration in the European Monetary System

Author

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  • Simón Sosvilla-Rivero

    (FEDEA and Universidad Complutense de Madrid)

  • Reyes Maroto Illera

    (FEDEA)

Abstract

This paper examines the regime changes in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS), applying the duration model approach to weekly data of eight currencies participating in the ERM, covering the complete EMS history. When using the non-parametric (univariate) analysis, we found that for those regimens with long durations, the ERM would have been relatively stable, while for the (more common) regimes associated with short durations would have been more unstable. The probability of maintaining a certain regime is estimated to be 0.685. When applying a parametric (multivariate) analysis to investigate the role of other variables in the probability of a regime change, we conclude that the interest rate differential with Germany and the magnitude of the realignment would have negatively affected the duration of a given regime, while credibility would have positively influenced such duration. Finally, when distinguishing between groups of currencies, we observe that those in the core are more stable than those in the periphery, obtaining evidence against equality of survival functions among these groups of currencies.

Suggested Citation

  • Simón Sosvilla-Rivero & Reyes Maroto Illera, 2002. "Regimen changes and duration in the European Monetary System," Working Papers 02-05, Asociación Española de Economía y Finanzas Internacionales.
  • Handle: RePEc:aee:wpaper:0205
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    References listed on IDEAS

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    1. Weber, A.A., 1991. "EMS Credibility," Papers 9103, Tilburg - Center for Economic Research.
    2. Ozkan, F Gulcin & Sutherland, Alan, 1995. "Policy Measures to Avoid a Currency Crisis," Economic Journal, Royal Economic Society, vol. 105(429), pages 510-519, March.
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    7. Fernandez-Rodriguez, Fernando & Sosvilla-Rivero, Simon & Andrada-Felix, Julian, 1999. "Exchange-rate forecasts with simultaneous nearest-neighbour methods: evidence from the EMS," International Journal of Forecasting, Elsevier, vol. 15(4), pages 383-392, October.
    8. Bajo-Rubio, Oscar & Sosvilla-Rivero, Simon & Fernandez-Rodriguez, Fernando, 2001. "Asymmetry in the EMS: New evidence based on non-linear forecasts," European Economic Review, Elsevier, vol. 45(3), pages 451-473, March.
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    13. Simon Sosvilla-Rivero & Fernando Fernandez-Rodriguez & Oscar Bajo-Rubio, 1999. "Exchange rate volatility in the EMS before and after the fall," Applied Economics Letters, Taylor & Francis Journals, vol. 6(11), pages 717-722.
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    15. Fernando Fernández-Rodríguez & Simón Sosvilla-Rivero & J. Martín-González., "undated". "Credibility in the EMS: New evidence using nonlinear forecastability tests," Working Papers 97-14, FEDEA.
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    Cited by:

    1. Victor Echevarria Icaza & Simón Sosvilla-Rivero, 2017. "Yields on sovereign debt, fragmentation and monetary policy transmission in the euro area: A GVAR approach," Working Papers 17-01, Asociación Española de Economía y Finanzas Internacionales.
    2. S. DeVicerte & P. Alvarez & J. Perez & C. Caso, 2008. "Does currency crisis identification matter?," Applied Financial Economics, Taylor & Francis Journals, vol. 18(5), pages 387-395.

    More about this item

    Keywords

    Duration models; exchange rates; European Monetary System;

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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