Exchange Rate Dynamics and Currency Unification: The Ostmark-DM Rate

Michael Burda and Stefan Gerlach ()

Empirical Economics, 1993, vol. 18, issue 3, 417-29

Abstract: This paper estimates a simple model of the exchange rate between the East and West German Mark immediately preceding German monetary union. Although there is a theoretical literature on exchange rate dynamics when the introduction of a fixed exchange rate is anticipated, the absence of data has limited empirical work on the subject. We show that in the first part of the sample, the DM-Ostmark exchange rate behaves as a random walk. In the second half, when monetary union appeared more likely, the exchange rate behaves as a weighted average of fundamentals and the expected "terminal" exchange rate.

Date: 1993
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Working Paper: Exchange Rate Dynamics and Currency Unification: The Ostmark-DM Rate (1990)
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