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THE ROLE AND NATURE OF MARKET SENTIMENT IN THE 1992 ERM CRISIS

Oreste Napolitano (), Alberto Montagnoli () and Rosaria Rita Canale

Public Policy Discussion Papers from Economics and Finance Section, School of Social Sciences, Brunel University

Abstract: This paper attempts to explain the importance of the role of the speculators in determining the 1992 ERM crisis, and the effects that the policy of maintaining external parity had on internal growth. We focus on a different way through which expectations are formed about the macroeconomic fundamentals independently of the behaviour of the monetary policy. In the present model, agents’ rational beliefs do not emerge from arbitrary circumstances but only when the value of the exchange rate, kept under control by the central bank, did not correspond to the expected value and to the current wide-spread beliefs in the market.

Pages: 17 pages
Date: 2002-09
New Economics Papers: this item is included in nep-his, nep-ifn and nep-mon
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