Political and institutional factors in regime change in the ERM: An application of duration analysis

Simon Sosvilla-Rivero and Francisco Pérez-Bermejo
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Francisco Pérez-Bermejo: KPMG-Spain
Authors registered in the RePEc Author Service: Francisco Perez Bermejo ()

No 07-05, Working Papers from Asociación Española de Economía y Finanzas Internacionales

Abstract: This paper analyses the functioning of the European Exchange Rate Mechanism (ERM). To that end, we apply duration models to estimate an augmented target-zone model, explicitly incorporating political and institutional factors into the explanation of European exchange rate policies. The estimations are based on quarterly data of eight currencies participating in the ERM, covering the complete history of the European Monetary System. Our results suggest that both economic and political factors are important determinants of the ERM currency policies. Concerning economic factors, the money supply, the real exchange rate, the interest in Germany and the central parity deviation would have negatively affected the duration of a given central parity, while credibility and the price level in Germany would have positively influenced such duration. Regarding political variables, elections, central bank independence and left-wing administrations would have increased the probability of maintaining the current regime, while unstable governments would have been associated with more frequent regime changes. Moreover, we show how the political augmented model outperforms, both in terms of explanatory power and goodness of fit, the model which just incorporates pure economic determinants.

Keywords: Duration analysis; political variables; exchange rates; European Monetary System (search for similar items in EconPapers)
JEL-codes: C41 D72 F31 F33 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2007-10
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-pol
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Related works:
Journal Article: Political and Institutional Factors in Regime Changes in the ERM: An Application of Duration Analysis (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:aee:wpaper:0705

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