Working Paper: CEPR ID: DP852
Authors: Andrew K. Rose; Lars E. O. Svensson
Abstract: Realignment expectations which measure exchange rate credibility are analysed for European exchange rates using daily financial data since the inception of the EMS. It is difficult to find economically meaningful relationships between realignment expectations and macroeconomic variables, although there are signs that lower inflation improves credibility. Statistically, many movements to realignment expectations are common to ERM participants. There were few indications of poor ERM credibility before late August 1992; the dimensions of the currency crisis of September 1992 appear to have taken both policy-makers and private agents largely by surprise.
Keywords: realignment expectations; currency crisis; ERM; EMS
JEL Codes: F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher inflation differentials relative to Germany (E31) | increase realignment expectations (D84) |
| increase realignment expectations (D84) | decrease credibility (D83) |
| decreases in international reserves (F31) | increase realignment expectations (D84) |