## Testing the Credibility of the Belgian Hard Currency Policy

_IMF Working Papers, August 1, 1991_

## Source details

**Canonical URL:** [Testing the Credibility of the Belgian Hard Currency Policy](https://www.imf.org/en/publications/wp/issues/2016/12/30/testing-the-credibility-of-the-belgian-hard-currency-policy-958)

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## Bibliographic details
- Authors: Vincent Koen
- Published: August 1, 1991
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451850147.001

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### Research question and context
- Interest rate differentials have been widely used to assess the degree of policy credibility.
- The paper identifies a problem: the relationship between the differential and credibility varies not only across maturities but also with the actual level of the exchange rate.
- An alternative approach is proposed, based on the construction of rate-of-return bands, to overcome this difficulty.
- Application: Belgium, which in May 1990 hardened its exchange rate policy stance.
- Comparisons are made with other small, open European economies.

### Methodology
- Constructs rate-of-return bands as an alternative to relying solely on interest rate differentials.
- Uses econometric analysis to test whether announcement and active implementation of a tighter exchange rate link affect credibility.

### Key findings and evidence
- The rate-of-return bands approach overcomes the sensitivity of interest rate differentials to maturity and exchange rate level.
- Econometric evidence is provided supporting the claim that the announcement and active implementation of a tighter exchange rate link does make a difference.
- The approach is applied to Belgium’s May 1990 policy hardening and compared with other small, open European economies.

### Subjects and keywords
- Subjects: 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

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/testing-the-credibility-of-the-belgian-hard-currency-policy-958_