Testing the Credibility of Belgium's Exchange Rate Policy

October 1, 1993

Preview Citation

Format: Chicago

Ioannis Halikias. Testing the Credibility of Belgium's Exchange Rate Policy, (USA: International Monetary Fund, 1993) accessed September 19, 2024

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

This paper 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. Simple interest rate corridor analysis, based on the Belgian-German long-term interest rate differential and taking explicit account of the currency’s position within its fluctuation band, would appear to suggest that the hypothesis that long-run exchange rate credibility has been attained should be rejected, even though considerable progress has been made in this regard since the early 1980s. The paper proceeds to decompose the Belgian-German interest rate differential into a sovereign credit risk and an exchange rate risk component, via the modelling of inflationary expectations, and concludes that long-run exchange rate credibility cannot be rejected from 1990 onwards.

Subject: 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 Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1993/076
Stock No:

WPIEA0761993
ISBN:

9781451849790
ISSN:

1018-5941

Notes

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

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