DP852 European Exchange Rate Credibility Before the Fall

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

Publication Date: November 1993

Keyword(s): Currency Crisis , EMS , ERM , Expectations , Realignment

JEL(s): F31

Programme Areas: International Macroeconomics

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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.