Credibility or exit speed? Reflections prompted by the 1992 EMS crisis

Annamaria Simonazzi and Fernando Vianello

No 11, Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma

Abstract: A common interpretation of the vicissitudes of the EMS holds that the credibility of EMS parities remained very high at least up to the Danish referendum of June 1992. In contrast, we argue that capital inflows into higher-inflation countries and falling interest differentials can coexist with the expectation of a realignment, provided international investors are confident in their ""exit speed"", i.e. in their ability to close or hedge open positions in good time. The uncovered interest parity is inapplicable, we maintain, to all cases in which the monetary authorities' expected behaviour is such as to justify the aforesaid confidence.

Keywords: EMS; credibility; interest differential. (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Pages: 21
Date: 1996-02
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