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The Determinants of Realignment Expectations Under the EMS - Some Empirical Regularities

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  • Chen, Zhaohui
  • Giovannini, Alberto

Abstract

The stability of the EMS depends crucially on the realignment expectations of market participants. In this paper we discuss how to measure such expectations and how to relate them to economic fundamentals, central bank reputation, and the institutional arrangements of the EMS. We find the following empirical regularities for FF/DM and IL/DM exchange rates: (1) expected devaluations are positively related to the current exchange rate deviation from the central parity; (2) expected devaluations are negatively related to the length of time since last realignment in the short and medium run; (3) the Basle-Nyborg agreements seem to have a stabilizing effect for both currencies examined, albeit through different channels; (4) large revaluation expectations occur immediately after devaluations. (1) and (4) are not inconsistent with the hypothesis of `over-speculation' or market inefficiency.

Suggested Citation

  • Chen, Zhaohui & Giovannini, Alberto, 1993. "The Determinants of Realignment Expectations Under the EMS - Some Empirical Regularities," CEPR Discussion Papers 790, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:790
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    Citations

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    Cited by:

    1. Mundaca, Gabriela, 2003. "A Drift of the "Drift Adjustment Method"," Memorandum 16/2002, Oslo University, Department of Economics.
    2. Mali J. Edison & Linda S. Kole, 1995. "European monetary arrangements: Implications for the dollar, exchange rate variability and credibility," European Financial Management, European Financial Management Association, vol. 1(1), pages 61-86, March.
    3. Radeck, Karin, 2002. "Wechselkurszielzonen, wirtschaftlicher Aufholprozess und endogene Realignmentrisiken," Discussion Paper Series 1: Economic Studies 2002,30, Deutsche Bundesbank.
    4. Ulf Söderström & Alexis Stenfors, 1995. "Explaining devaluation expectations in the EMS," Finnish Economic Papers, Finnish Economic Association, vol. 8(2), pages 63-81, Autumn.
    5. Peria, Maria Soledad Martinez, 1999. "A regime - switching approach to studying speculative attacks : focus on European Monetary System crises," Policy Research Working Paper Series 2132, The World Bank.
    6. Pierre Siklos & Rod Tarajos, 1996. "Fundamentals and devaluation expectations in target zones: Some new evidence from the ERM," Open Economies Review, Springer, vol. 7(1), pages 35-59, January.
    7. Honohan, Patrick & Conroy, Charles, 1994. "Irish Interest Rate Fluctuations in The European Monetary System," Research Series, Economic and Social Research Institute (ESRI), number GRS165, June.
    8. Vlaar, P. J. G. & Palm, F. C., 1997. "Inflation differentials and excess returns in the European Monetary System," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 7(1), pages 1-20, April.
    9. Ozkan, F. Gulcin & Sutherland, Alan, 1998. "A currency crisis model with an optimising policymaker," Journal of International Economics, Elsevier, vol. 44(2), pages 339-364, April.
    10. M. Araceli Rodríguez López, "undated". "Variables fundamentales o ataques "Self-fulfilling"? Una explicación a las crisis de credibilidad de la peseta espanola," Studies on the Spanish Economy 90, FEDEA.
    11. Ms. Selma Mahfouz & Mr. Richard Hemming & Mr. Michael Kell, 2002. "The Effectiveness of Fiscal Policy in Stimulating Economic Activity: A Review of the Literature," IMF Working Papers 2002/208, International Monetary Fund.
    12. Eva Gutierrez, 1996. "A model of realignment in the EMS," Investigaciones Economicas, Fundación SEPI, vol. 20(2), pages 161-176, May.
    13. Giorgioni, Gianluigi & Holden, Ken, 2002. "The crisis of the CFA Franc zone: the case of Cote d'Ivoire," Economic Modelling, Elsevier, vol. 19(4), pages 531-564, August.
    14. Benoît Cœuré & Antoine Magnier, 1996. "Crédibilité et fondamentaux macro-économiques au sein du SME : un examen empirique," Économie et Prévision, Programme National Persée, vol. 123(2), pages 113-146.
    15. Cecilia Jona-Lasinio, 1999. "Le Franc français et la récente crise monétaire européenne," Économie et Prévision, Programme National Persée, vol. 140(4), pages 147-159.
    16. I. Paya & A. Duarte & K. Holden, 2003. "On the equilibrium value of the peseta," Applied Financial Economics, Taylor & Francis Journals, vol. 13(5), pages 317-335.

    More about this item

    Keywords

    Basle-Nyborg Agreements; EMS; Exchange Rates; Realignment;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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