Paper #128

Title:

Bands width, credibility and exchange risk: Lessons from the EMS experience

Authors:

Marta Gómez Puig and José García Montalvo

Date:

December 1994 (Revised: June 1995)

Abstract:

This paper presents an analysis of the credibility of the EMS currencies that covers the period before and after the increase in the bands of fluctuation. Our credibility indicator is based on the inferred probabilities derived from the estimation of a Markov-switching model (Hamilton (1989)) applied to the expected rate of depreciation. The results show that, for most of the currencies, credibility has improved, at least transitorily, after the increase in the bands. However, for all currencies, the credibility measured by the indicator proposed in this paper has been eroded recently even with the widened bands. 

Area of Research:

Macroeconomics and International Economics

Published in:

European Economic Review, 41, 8, (1997)
With the title:
A New Indicator to Assess the Credibility of the EMS

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