Testing the Credibility of Belgium's Exchange Rate Policy

Author/Editor:

Ioannis Halikias

Publication Date:

October 1, 1993

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:

This paper examines the credibility of the exchange rate policy pursued by the Belgian monetary authorities of pegging the Belgian franc to a narrow fluctuation band around the deutsche mark, in the context of the exchange rate mechanism of the European Monetary System. Simple interest rate corridor analysis, based on the Belgian-German long-term interest rate differential and taking explicit account of the currency’s position within its fluctuation band, would appear to suggest that the hypothesis that long-run exchange rate credibility has been attained should be rejected, even though considerable progress has been made in this regard since the early 1980s. The paper proceeds to decompose the Belgian-German interest rate differential into a sovereign credit risk and an exchange rate risk component, via the modelling of inflationary expectations, and concludes that long-run exchange rate credibility cannot be rejected from 1990 onwards.

Series:

Working Paper No. 93/76

Subject:

Notes:

Also published in Staff Papers, Vol. 41, No. 2, June 1994.

English

Publication Date:

October 1, 1993

ISBN/ISSN:

9781451849790/1018-5941

Stock No:

WPIEA0761993

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

40

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