Testing the Credibility of the Belgian Hard Currency Policy
August 1, 1991
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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.
Subject: Currencies, Economic and financial statistics, Exchange rates, Financial services, Financial statistics, Foreign exchange, Long term interest rates, Money, Public debt
Keywords: band vis-à-vis, Currencies, Danish krone, debt ratio, deutsche mark rate, Exchange rates, Financial statistics, inflation differential, interest rate, interest rate differential, Long term interest rates, mechanism of the EMS, short term exchange rate volatility, vis-à-vis Germany, WP
Pages:
38
Volume:
1991
DOI:
Issue:
079
Series:
Working Paper No. 1991/079
Stock No:
WPIEA0791991
ISBN:
9781451850147
ISSN:
1018-5941
