DP552 Expected and Predicted Realignments: The FF/DM Exchange Rate During the EMS

Author(s): Andrew K Rose , Lars E O Svensson

Publication Date: July 1991

Keyword(s): Devaluation , European Monetary System , Exchange Rate , Realignment , Target Zone

JEL(s): F31 , F33

Programme Areas: International Macroeconomics

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An empirical model of time-varying realignment in an exchange rate target zone is developed. Expected rates of devaluation are estimated as the difference between interest rate differentials and estimated expected rates of depreciation within the exchange rate band, using French franc/Deutschmark data during the European Monetary System. The behaviour of estimated expected rates of depreciation accord well with the theoretical model of Bertola-Svensson (1990). We are also able to predict actual realignments with some success.