Testing the Credibility of Belgium's Exchange Rate Policy

IMF Working Papers, October 1, 1993

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Testing the Credibility of Belgium's Exchange Rate Policy

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Bibliographic details

• Authors: Ioannis Halikias
• Published: October 1, 1993
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451849790.001

Summary and Scope

• 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.
• Notes that "considerable progress has been made in this regard since the early 1980s."
• Paper length: 40 pages.
• Series and identifiers:
  • Volume: 1993
  • Issue: 076
  • Series: Working Paper No. 1993/076
  • DOI: https://doi.org/10.5089/9781451849790.001
  • Stock No: WPIEA0761993
  • ISBN: 9781451849790
  • ISSN: 1018-5941

Key Analytical Approach

• Primary diagnostic tool: simple interest rate corridor analysis based on the Belgian-German long-term interest rate differential and explicit account of the currency’s position within its fluctuation band.
• Decomposition strategy: decomposes the Belgian-German interest rate differential into
  • a sovereign credit risk component, and
  • an exchange rate risk component,

via modelling of inflationary expectations.

Principal Findings

• From interest rate corridor analysis:
  • The hypothesis that long-run exchange rate credibility has been attained should be rejected (based on Belgian-German long-term interest rate differential and band position).
• After decomposition and modelling inflationary expectations:
  • Concludes that long-run exchange rate credibility cannot be rejected from 1990 onwards.
• Temporal emphasis:
  • Progress in credibility noted since the early 1980s.
  • Credibility not rejectable beginning in 1990 according to the decomposition approach.

Subjects and Keywords Covered

• Subject areas: Credit risk, Exchange rates, Financial regulation and supervision, Financial services, Foreign exchange, Inflation, Interest rate corridor, Long term interest rates, Monetary policy, Prices.
• Keywords: corridor analysis, Credit risk, deutsche mark, exchange rate, exchange rate credibility, Exchange rates, fluctuation band, Inflation, inflation differential, interest rate, Interest rate corridor, interest rate differential, Long term interest rates, U.S. dollar, vis-à-vis Germany, Western Europe, WP.

Publication and Access Notes

• Also published in Staff Papers, Vol. 41, No. 2, June 1994.
• Author: Ioannis Halikias
• Date on landing page: October 1, 1993

Source: IMF Working Papers — "Testing the Credibility of Belgium's Exchange Rate Policy" by Ioannis Halikias, Working Paper No. 1993/076