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

Listed author(s):
  • Annamaria Simonazzi
  • Fernando Vianello

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.

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Paper provided by University of Rome La Sapienza, Department of Public Economics in its series Working Papers with number 11.

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Length: 21
Date of creation: Feb 1996
Handle: RePEc:sap:wpaper:wp11
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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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