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The Credibility of the European Monetary System: A Review

  • Francisco Ledesma-Rodríguez
  • Manuel Navarro-Ibáñez
  • Jorge Pérez-Rodríguez
  • Simón Sosvilla-Rivero

The paper presents an overview of several studies about the credibility of the European Monetary System (EMS). These studies compare different credibility indicators in terms of their ability to detect exchange rate crises in a target zone. Marginal credibility seems to be the best measure for capturing the main events. The credibility indices are also applied to the first years of the current ERM-II. The history of the EMS suggests that, in an environment of financial deregulation and high capital flows, such an exchange rate system can only operate as a temporary regime that is moving towards a full monetary union, since it may be too fragile as a permanent monetary regime.

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Paper provided by FEDEA in its series Studies on the Spanish Economy with number 179.

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Handle: RePEc:fda:fdaeee:179
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  1. 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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  7. Rose, A.K. & Svensson, L.E.O., 1993. "European Exchange Rate Credibility Before the Fall," Papers 542, Stockholm - International Economic Studies.
  8. Brendan M. Walsh, 1993. "The Irish pound and the ERM : lessons from the September crisis and its aftermath," Working Papers 199314, School of Economics, University College Dublin.
  9. Taylor, Stephen J, 1992. "Rewards Available to Currency Futures Speculators: Compensation for Risk or Evidence of Inefficient Pricing?," The Economic Record, The Economic Society of Australia, vol. 0(0), pages 105-16, Supplemen.
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  16. Ledesma Rodríguez, F. J. & Navarro Ibáñez, Manuel & Pérez Rodríguez, J.V. & Sosvilla Rivero, S., 1999. "A study of the credibility of the Spanish peseta," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 11, pages 85-100, Febrero.
  17. Hochreiter, Eduard & Tavlas, George S., 2004. "On the road again: an essay on the optimal path to EMU for the new member states," Journal of Policy Modeling, Elsevier, vol. 26(7), pages 793-816, October.
  18. James J. Heckman, 1976. "The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 475-492 National Bureau of Economic Research, Inc.
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