Testing the Credibility of the Belgian Hard Currency Policy

Author/Editor:

Vincent Koen

Publication Date:

August 1, 1991

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Interest rate differentials have been widely used to assess the degree of policy credibility. A problem with this measure, however, is that the relationship between the differential and credibility varies not only across maturities but also with the actual level of the exchange rate. The alternative approach used in this paper, based on the construction of rate-of-return bands, overcomes this difficulty. It is applied to Belgium, which in May 1990 hardened its exchange rate policy stance. Comparisons with other small, open European economies are carried out. Econometric evidence is provided supporting the claim that the announcement and active implementation of a tighter exchange rate link does make a difference.

Series:

Working Paper No. 1991/079

Subject:

Currencies Economic and financial statistics Exchange rates Financial services Financial statistics Foreign exchange Long term interest rates Money Public debt

English

Publication Date:

August 1, 1991

ISBN/ISSN:

9781451850147/1018-5941

Stock No:

WPIEA0791991

Pages:

38

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