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Assensing the Credibility of the Irish Pound in the European Monetary System

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

No 2000-14, Working Papers from FEDEA

Abstract: In this paper we present new insights in the literature on the credibility of the Irish pound in the European Monetary System (EMS), adding value to the previous research, which has focused either on the correlation between Irish interest rates and Irish pound/Pound sterling exchange rate (therefore examining the credibility in an indirect way) or on the traditional credibility indicators. In contrast, we try to to provide some additional evidence making use of a wider set of credibility indicators, including the marginal credibility that has not been examined before for the Irish case. At the same time, we extend the analysis by considering in our sample the more recent events in the EMS history, particularly the broadening of fluctuation bands in 1993. Our results suggest credibility gains (i) after the realignments of the Irish pound on 4 August 1986, on 12 January 1987 and on 1 February 1993; (ii) after the broadening of the fluctuation bands to ± 15% on 2 August 1993; and (iii) around the devaluation of the Spanish peseta and the Portuguese escudo on 6 March 1995. On the other hand, we detect some occasional reductions in credibility, notably before the monetary turmoil registered in September 1992 and after the Italian lira rejoined the Exchange Rate Mechanism on 25 November 1996.

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