Explaining Devaluation Expectations in the EMS
This paper is an attempt to explain devaluation expectations in the ERM with macroeconomic fundamentals. Two different measures of devaluation expectations are used; expectations estimated using the drift-adjustment method of Bertola and Svensson  and the directly observable interest rate differential. The interest rate differential seems more closely connected to macroeconomic fundamentals than the estimates stemming from the drift- adjustment metod. For the ERM as a whole, an expanded theoretic model of exchange rate determination explains a considerable part of the devaluation expectations, whereas for individual countries additional variables are important, and the relationships are ambiguous and country specific.
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|Date of creation:||Jun 1994|
|Date of revision:|
|Publication status:||Published in Finnish Economic Papers, 1995, pages 63-81|
|Contact details of provider:|| Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden|
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- Rose, Andrew K. & Svensson, Lars E. O., 1994.
"European exchange rate credibility before the fall,"
European Economic Review,
Elsevier, vol. 38(6), pages 1185-1216, June.
- Rose, A.K. & Svensson, L.E.O., 1993. "European Exchange Rate Credibility Before the Fall," Papers 542, Stockholm - International Economic Studies.
- Rose, Andrew K & Svensson, Lars E O, 1993. "European Exchange Rate Credibility Before the Fall," CEPR Discussion Papers 852, C.E.P.R. Discussion Papers.
- Andrew K. Rose & Lars E.O. Svensson, 1993. "European Exchange Rate Credibility Before the Fall," NBER Working Papers 4495, National Bureau of Economic Research, Inc.
- Svensson, Lars E O, 1991.
"The Simplest Test of Target Zone Credibility,"
CEPR Discussion Papers
493, C.E.P.R. Discussion Papers.
- Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
- Zhaohui Chen & Alberto Giovannini, 1992. "Estimating Expected Exchange Rates Under Target Zones," NBER Working Papers 3955, National Bureau of Economic Research, Inc.
- Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 669-682.
- Vincent Koen, 1991. "Testing the Credibility of the Belgian Hard Currency Policy," IMF Working Papers 91/79, International Monetary Fund.
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