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Assessing the credibility of a target zone: evidence from the EMS

Francisco Ledesma (), Manuel Navarro-Ibáñez (), Jorge Pérez-Rodríguez () and Simon Sosvilla-Rivero ()

Applied Economics, 2005, vol. 37, issue 19, 2265-2287

Abstract: This paper provides some new evidence on the credibility of the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). The study differs from previous research in the literature in three main respects. First, the main contribution is the use of several credibility indicators, some of which have never been applied before to all of the currencies under study. This allows one to strengthen the results obtained in this paper. Second, a longer period than that of previous studies is analysed, covering the complete EMS history. Third, a comparison has been made of the prediction qualities of the different indicators, in order to explore their ability to capture the main ERM events (realignments, changes in the fluctuations bands and speculative pressures). Fourth, the indicators are applied to the experience of the new, modified ERM linking the currencies of non-euro area Member States to the euro, showing the relevance of this approach in the near future with the enlargement of the European Union.

Date: 2005
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DOI: 10.1080/00036840500293722

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