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The European Monetary System: Credible at Last?

  • Jeffrey Frankel
  • Steven Phillips

We update tests of the credibility of the EMS exchange rate target zones. Our main methodological innovation is to use a survey of exchange rate forecasts, as well as interest differentials, in measuring exchange rate expectations. We investigate the hypothesis -- suggested by the apparent stabilization of the EMS and by recent institutional developments -- that the EMS target zones have experienced an increase in credibility since their 1987 realignment. The evidence tends to support this hypothesis for most currencies. We also examine the empirical failure of standard target zone models, but find no evidence that it can be attributed to mismeasurement of expectations. Finally, we consider an alternative credibility measure which captures the importance of possible realignments in overall expectations of exchange rate changes.

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File URL: http://www.nber.org/papers/w3819.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3819.

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Date of creation: Aug 1991
Date of revision:
Publication status: published as Oxford Economic Papers: 44, 1992, 791-816
Handle: RePEc:nbr:nberwo:3819
Note: ITI IFM
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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