The Credibility of the European Exchange Rate Mechanism

Klaas Knot, Jan-Egbert Sturm and Jakob de Haan

Oxford Economic Papers, 1998, vol. 50, issue 2, 186-200

Abstract: Using a panel data approach and three different credibility measures, the authors argue that unemployment, inflation, and budget deficits in participating countries have affected the credibility of the exchange rate mechanism of the European Monetary System. In contrast to most previous research, which focuses upon the credibility of exchange rate policies of individual member states, the analysis focuses upon the credibility of the system. The credibility indicators used are short- and long-term interest differentials vis-a-vis Germany and short-term interest differentials which have been adjusted for expected exchange rate movements within the band. Both long-term and error-correction models are estimated. Copyright 1998 by Royal Economic Society.

Date: 1998
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