Market Expectations in the UK Before and After the ERM Crisis

Paul Söderlin

Economica, 2000, vol. 67, issue 265, 1-18

Abstract: The British pound left the ERM on 16 September 1992 after a period of turbulence. UK monetary policy soon shifted to lower short interest rates, and an inflation target was announced. This paper uses daily option prices to estimate how the market's probability distribution of the future mark–pound exchange rate and UK and German interest rates changed over the summer and autumn of 1992. The results show, among other things, how various policy decisions affected the market's assessment of the probabilities of realignments and lending rate cuts.

Date: 2000
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