The Determinants of Realignment Expectations Under the EMS: Some Empirical Regularities, Issue 4291
The stability of the EMS depends crucially on realignment expectations of the market participants. In this paper we discuss how to measure such expectations and how to relate them to economic fundamentals, central bank reputation, and institutional arrangements of the EMS. We find the following empirical regularities for FF/DM and IL/DM exchange rates: (1) expected devaluations are positively related to the current exchange rate deviation from the central parity; (2) expected devaluations are negatively related to the length of time since last realignment in the short and medium run; (3) the Basle-Nyborg agreements seem to have a stabilizing effect for both currencies examined, albeit through different channels; (4) large revaluation expectations occur immediately after devaluations. (1) and (4) are not inconsistent with the hypothesis of over-speculation or market inefficiency.
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1-month 155 Standard Error adjustable parity systems Autocorrelation Basle-Nyborg agreements Bureau of Economic central bank central parity Chen Alberto Giovannini Coefficient t-Value p-Value Credibility DETERMINANTS OF REALIGNMENT Devaluation March 1979 Diagnostics Number Durbin-Watson Economic Research Evidence exchange-rate expectations of parity expected change expected parity changes expected realignment FF/DM Devaluation FF/DM Expected Devaluation figures 1A Final Regression Results Financial fluctuation band foreign exchange market French Franc Giovannini 1992b hypothesis i-squared IL/DM Devaluation March IL/DM Expected information set information variables interest rate differential Interest Rate Parity International Financial Statistics Italy January Kydland last realignment lira measure of expected Michael Woodford mimeo Monetary Policy National Bureau NBER Number of observations observations 155 Standard OECD One-Month FF/DM Expected One-Month IL/DM p—value projection equation proxy rate parity rational expectations realignment expectations Regime Dummies Regression March 1979 Results With Regime significant Svensson table IB term premium Variable Coefficient t-Value Zhaohui Chen Alberto Zvi Griliches