Expected Devaluation and Economic Fundamentals

Author/Editor:

Alun H. Thomas

Publication Date:

November 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:

Recent incidents of exchange rate collapse have provoked interest in the extent to which such events are determined by economic fundamentals. This paper considers whether interest rate differentials are appropriate measures of the risk of devaluation and whether this measure of devaluation risk reflects the movements of variables which capture internal and external balance. The paper finds that interest rate differentials reflect devaluation risk but that movements in fundamental variables have only a weak effect on devaluation risk in France and Italy. The most significant influence on devaluation risk is the position of the currency in its band in that the lower is the exchange value of a currency within the band, the greater is the perceived risk of devaluation.

Series:

Working Paper No. 93/83

Notes:

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

English

Publication Date:

November 1, 1993

ISBN/ISSN:

9781451954517/1018-5941

Stock No:

WPIEA0831993

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

40

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