Working Paper: CEPR ID: DP485
Authors: Michael Burda; Stefan Gerlach
Abstract: This paper studies the exchange rate between the East and West German mark in the period before German monetary union. We show that standard exchange rate theory contains strong predictions about the dynamics of the exchange rate under these circumstances, and we use state-space methods to estimate key parameters of the model. A random-walk model gives a good fit to the first half of the data, during which it was unclear that monetary union would occur. In the second half, when union was expected, the Ostmark rate behaves as a weighted average of fundamentals and the expected terminal exchange rate.
Keywords: ostmark; deutschmark; monetary union; kalman filtering
JEL Codes: 431
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Anticipation of monetary union (F36) | Dynamics of the exchange rate (F31) |
| Expected pegging rate (E43) | Dynamics of the exchange rate (F31) |
| Unobservable fundamentals (D89) | Exchange rate behavior (random walk) (F31) |
| Time-varying weights (C22) | Exchange rate behavior (weighted average) (F31) |
| Market participants' expectations (D84) | Anticipation of monetary union (F36) |