Assessing Target Zone Credibility: Mean Reversion and Devaluation Expectations in the EMS
October 1, 1991
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Summary
The paper presents estimates of devaluation expectations for six EMS currencies relative to the Deutsche mark, for the period March 1979-May 1990. The estimation method is simple and operational, and consistently generates sensible results. The estimates are constructed by the adjusting interest rate differentials by subtracting estimated expected rates of depreciation within the exchange rate band. The adjustment is nontrivial because exchange rates within the ERM bands display mean reversion rather than random walk (unit root) behavior. The adjustment is essential since the expected rates of depreciation are usually of about the same magnitude as the interest rate differentials.
Subject: Crawling peg, Currencies, Depreciation, Exchange rate risk, Exchange rates, Financial regulation and supervision, Foreign exchange, Money, National accounts, Public expenditure review
Keywords: Crawling peg, Currencies, Depreciation, devaluation expectation, DM exchange rate, Exchange rate risk, Exchange rates, expected rates of depreciation, interest rate differential, mean reversion, rate of devaluation, WP
Pages:
35
Volume:
1991
DOI:
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Issue:
096
Series:
Working Paper No. 1991/096
Stock No:
WPIEA0961991
ISBN:
9781451949964
ISSN:
1018-5941
