Detection of Implicit Fluctuation Bands and Their Credibility in Candidate Countries
37 Pages Posted: 19 May 2015
Date Written: May 19, 2015
This paper attempts to identify implicit exchange rate regimes for currencies of EU candidate countries vis-à-vis the euro. To that end, we apply three sequential procedures that consider the dynamics of exchange rates to data covering the period from 1999:01 to 2012:12. Our results would suggest that implicit bands have existed in many sub-periods for almost all currencies under study. Once we detect de facto discrepancies between de facto and de iure exchange rate regimes, we make use of different methods to study the credibility of the detected fluctuation bands. The detected lack of credibility in a high percentage of the sample is robust using the Drift Adjustment method and discrete choice models, suggesting that economic agents do not behave as if these bands actually were in force at time of making their financial plans. These countries do not improve the confidence on the fluctuation bands as time evolves.
Keywords: Exchange-rate regimes; implicit fluctuation bands; credibility; exchange rates
JEL Classification: F31, F33
Suggested Citation: Suggested Citation