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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 ()

No 2001-04, Working Papers from FEDEA

Abstract: In this paper we provide some new evidence on the credibility of the ERM. Our paper differs from the previous literature in three main respects. First, its main contribution is the use of several credibility indicators, some of them never been applied before to all the currencies under study. This allows to strengthen the results obtained in this paper. Second, we analyse a longer period than that considered in previous studies, covering the complete EMS history. Third, we have carried out a simple comparison of the prediction qualities of the different indicators, in order to explore their ability to capture the main ERM events. Our results suggest credibility gains for most of the currencies before the monetary turmoil in 1992, followed by generalised credibility losses. After the widening of the fluctuation bands, there is evidence of a gradual improvement in credibility. Finally, the marginal credibility measure seems to be the best credibility indicator to capture the main events in the EMS history.

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