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Regimen changes and duration in the European Monetary System

  • Simón Sosvilla-Rivero

    (FEDEA and Universidad Complutense de Madrid)

  • Reyes Maroto Illera

    (FEDEA)

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.

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Paper provided by Asociación Española de Economía y Finanzas Internacionales in its series Working Papers with number 02-05.

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Length: 32 pages
Date of creation: Dec 2002
Date of revision:
Handle: RePEc:aee:wpaper:0205
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  1. F. FernAndez-RodrIguez & S. Sosvilla-Rivero & J. Andrada-FElix, 2003. "Technical analysis in foreign exchange markets: evidence from the EMS," Applied Financial Economics, Taylor & Francis Journals, vol. 13(2), pages 113-122.
  2. Fernando Fernández-Rodríguez & Simón Sosvilla-Rivero & Julián Andrada, . "Exchange-rate forecasts with simultaneous nearest-neighbour methods: Evidence from the EMS," Working Papers 98-17, FEDEA.
  3. Svensson, Lars E O, 1991. "The Simplest Test of Target Zone Credibility," CEPR Discussion Papers 493, C.E.P.R. Discussion Papers.
  4. Óscar Bajo Rubio & Simón Sosvilla Rivero & Fernando Fernández Rodríguez, 2000. "Asymmetry In The Ems: New Evidence Based On Non-Linear Forecasts," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 0001, Departamento de Economía - Universidad Pública de Navarra.
  5. Bertola, Giuseppe & Caballero, Ricardo, 1990. "Target Zones and Realignments," CEPR Discussion Papers 398, C.E.P.R. Discussion Papers.
  6. Fernando Fernández-Rodríguez & Simón Sosvilla-Rivero & J. Martín-González., . "Credibility in the EMS: New evidence using nonlinear forecastability tests," Working Papers 97-14, FEDEA.
  7. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 669-682.
  8. Weber, A., 1991. "EMS Credibility," Discussion Paper 1991-3, Tilburg University, Center for Economic Research.
  9. Ozkan, F Gulcin & Sutherland, Alan, 1995. "Policy Measures to Avoid a Currency Crisis," Economic Journal, Royal Economic Society, vol. 105(429), pages 510-19, March.
  10. Bryon Higgins, 1993. "Was the ERM crisis inevitable?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 27-40.
  11. Lars E. O. Svensson, 1992. "An Interpretation of Recent Research on Exchange Rate Target Zones," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 119-144, Fall.
  12. Kiefer, Nicholas M, 1988. "Economic Duration Data and Hazard Functions," Journal of Economic Literature, American Economic Association, vol. 26(2), pages 646-79, June.
  13. De Grauwe, Paul & Dewachter, Hans & Veestraeten, Dirk, 1999. "Explaining Recent European Exchange-Rate Stability," International Finance, Wiley Blackwell, vol. 2(1), pages 1-31, April.
  14. Edin, P.A. & Vredin, A., 1991. "Devaluation Risk in Target Zones: Evidence from the Nordic Countries," Papers 1991g, Uppsala - Working Paper Series.
  15. 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.
  16. Weber, A.A., 1991. "EMS Credibility," Papers 9103, Tilburg - Center for Economic Research.
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