Explaining Devaluation Expectations in the EMS

Alexis Stenfors and Ulf Söderström ()

No 20, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: This paper is an attempt to explain devaluation expectations in the ERM with macroeconomic fundamentals. Two different measures of devaluation expectations are used; expectations estimated using the drift-adjustment method of Bertola and Svensson [1993] and the directly observable interest rate differential. The interest rate differential seems more closely connected to macroeconomic fundamentals than the estimates stemming from the drift- adjustment metod. For the ERM as a whole, an expanded theoretic model of exchange rate determination explains a considerable part of the devaluation expectations, whereas for individual countries additional variables are important, and the relationships are ambiguous and country specific.

Keywords: Target zones; interest rates; realignments (search for similar items in EconPapers)
JEL-codes: E43 E44 F31 (search for similar items in EconPapers)
Pages: 30 pages
Date: 1994-06
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Published in Finnish Economic Papers, 1995, pages 63-81

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:hastef:0020

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