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Market Expectations in the UK Before and After the ERM Crisis

The British pound left the ERM on 16 September 1992 after a period of turbulence. UK monetary policy soon shifted to lower short interest rates and an inflation target was announced. This paper uses daily option prices to estimate how the market's probability distribution of the future marks/pound exchange rate and UK and German interest rates changed over the summer and autumn of 1992. The results show, among other things, how various policy decisions affected the market's assessment of the probabilities of realignments and lending rate cuts.

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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 210.

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Length: 25 pages
Date of creation: 08 Dec 1997
Date of revision: 01 Sep 1998
Publication status: Published in Economica, 2000, pages 1-18.
Handle: RePEc:hhs:hastef:0210
Note: Old title: Extracting Expectations about UK Monetary Policy 1992 from Option Prices
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