On the Credibility of the Irish Pound in the EMS

Foundation for Applied Economic Studies (FEDEA) Working Paper No. 2000-14

31 Pages Posted: 17 Sep 2001

See all articles by Francisco Ledesma Rodríguez

Francisco Ledesma Rodríguez

University of La Laguna - Department of Applied Economics

Manuel Navarro Ibáñez

University of La Laguna - Department of Applied Economics

Jorge Pérez Rodríguez

University of Las Palmas de Gran Canaria - Faculty of Economic Science

Simon Sosvilla-Rivero

UCM Institute for Economic Analysis

Date Written: April 2000

Abstract

In this paper we present new insights in the literature on the credibility of the Irish pound in the European Monetary System (EMS), adding value to the previous research, which has focused either on the correlation between Irish interest rates and Irish Pound/Pound Sterling exchange rate (therefore examining the credibility in an indirect way) or on the traditional credibility indicators. In contrast, we try to provide some additional evidence making use of a wider set of credibility indicators, including the marginal credibility that has not been examined before for the Irish case.

At the same time, we extend the analysis by considering in our sample the more recent events in the EMS history, particularly the broadening of fluctuation bands in 1993. Our results suggest credibility gains (i) after the realignments of the Irish pound on 4 August 1986, on 12 January 1987 and on 1 February 1993; (ii) after the broadening of the fluctuation bands to ? 15% on 2 August 1993; and (iii) around the devaluation of the Spanish peseta and the Portuguese escudo on 6 March 1995. On the other hand, we detect some occasional reductions in credibility, notably before the monetary turmoil registered in September 1992 and after the Italian lira rejoined the Exchange Rate Mechanism on 25 November 1996.

Finally, it is interesting to note that our results suggest that the marginal credibility measure seems to be the best credibility indicator to capture the main events of the sample period. Therefore, the use of an econometric technique that allows the parameters to change along time is quite appropriate for the study of credibility in a target zone (i.e., stabilizing interventions by the central banks, speculative movements by private agents, and realignments modify the parameters of the process along the period studied), justifying further the contribution of our paper.

Keywords: Credibility, Target zone, Irish Pound

JEL Classification: F31, F33

Suggested Citation

Ledesma Rodríguez, Francisco J. and Navarro Ibáñez, Manuel and Pérez Rodríguez, Jorge and Sosvilla-Rivero, Simon, On the Credibility of the Irish Pound in the EMS (April 2000). Foundation for Applied Economic Studies (FEDEA) Working Paper No. 2000-14. Available at SSRN: https://ssrn.com/abstract=275252 or http://dx.doi.org/10.2139/ssrn.275252

Francisco J. Ledesma Rodríguez

University of La Laguna - Department of Applied Economics ( email )

Facultad de Ciencias Economicas
Campus de Guajara
38071 La Laguna
Spain
+34 922 31 71 19 (Phone)
+34 922 31 78 53 (Fax)

Manuel Navarro Ibáñez

University of La Laguna - Department of Applied Economics ( email )

Facultad de Ciencias Economicas
Campus de Guajara
La Laguna, Santa Cruz de Tenerife 38071
Spain
+34 922 31 71 11 (Phone)

Jorge Pérez Rodríguez

University of Las Palmas de Gran Canaria - Faculty of Economic Science ( email )

Dpto. de Metodos Cuantitativo Campus de Tafira, Tafira Baja
E-35017 Las Palmas
Spain
+34 928 458222 (Phone)
+34 928-458225 / 1829 (Fax)

HOME PAGE: http://fcee.ulpgc.es/~jorge/

Simon Sosvilla-Rivero (Contact Author)

UCM Institute for Economic Analysis ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

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