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Credibility or exit speed? Reflections prompted by the 1992 EMS crisis

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  • Annamaria Simonazzi
  • Fernando Vianello

Abstract

A common interpretation of the vicissitudes of the EMS holds that the credibility of EMS parities remained very high at least up to the Danish referendum of June 1992. In contrast, we argue that capital inflows into higher-inflation countries and falling interest differentials can coexist with the expectation of a realignment, provided international investors are confident in their "exit speed", i.e. in their ability to close or hedge open positions in good time. The uncovered interest parity is inapplicable, we maintain, to all cases in which the monetary authorities' expected behaviour is such as to justify the aforesaid confidence.

Suggested Citation

  • Annamaria Simonazzi & Fernando Vianello, 1996. "Credibility or exit speed? Reflections prompted by the 1992 EMS crisis," Working Papers 11, University of Rome La Sapienza, Department of Public Economics.
  • Handle: RePEc:sap:wpaper:wp11
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    References listed on IDEAS

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    1. Kenneth A. Froot & Jeffrey A. Frankel, 1989. "Forward Discount Bias: Is it an Exchange Risk Premium?," The Quarterly Journal of Economics, Oxford University Press, vol. 104(1), pages 139-161.
    2. Kees Koedijk & Clemens Kool, 1993. "Betting on the EMS," Open Economies Review, Springer, vol. 4(2), pages 151-173, June.
    3. Stefano Cavaglia & Kees Koedijk & Peter Vlaar, 1994. "Exchange rate expectations and risk premia in the European Monetary System: 1985–1991," Open Economies Review, Springer, vol. 5(4), pages 347-360, October.
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    Keywords

    EMS; credibility; interest differential.;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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