 The Expected Timing of EMS Realignments: 1979-83Susan M. Collins No 4068, NBER Working Papers from National Bureau of Economic Research, Inc Abstract: This paper develops and estimates a model of the time at which market participants expected the French franc to be devalued relative to the German deutschemark during the early years of the European Monetary System. The model assumes that the expected time of exchange rate realignment is determined by the time at which foreign exchange reserves in the Banque de France first fall below a critical threshold level, and that reserves are a Brownian motion process with a drift that depends on current economic conditions. Thus, the probability distribution for the time of the next realignment is an Inverse Gaussian distribution. The empirical analysis uses the term structure of forward exchange rate premia to form indicators of perceived probabilities of realignment over various time horizons. The model fits quite well, especially prior to the March 1983 realignment. The estimation suggests that the expected timing of realignments was quite sensitive to the level of reserves in France and to factors that affect the mean rate of change of reserves. Date: 1992-05 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:4068 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC. |
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