Forward Interest Rates as Predictors of EMU
The use of forward interest rates with a settlement time after the start of EMU (1 January 1999) allows us to derive probabilities attached by the market to the occurrence of EMU. We use the DM/ECU forward interest rates as our central source of information. We arrive at the conclusion that the market attaches a very low probability to the ECU being transformed into the Euro, with an irrevocably fixed exchange rate with the other EMU member countries, by 1999. We also compute the probabilities of entry into EMU for individual currencies.
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