Assessing the Credibility of a Target Zone: Evidence from the EMS

Centra Working Paper E2003/33

44 Pages Posted: 14 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: June 2003

Abstract

This paper provides some new evidence on the credibility of the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). We differ from previous studies in the literature in three main respects. First, our main contribution is the use of several credibility indicators, some of which have never been applied before to all of the currencies under study. This allows us to strengthen the results obtained in this paper. Second, we analyse a longer period than that of previous studies, covering the complete EMS history. Third, we have carried out a comparison of the prediction qualities of the different indicators, in order to explore their ability to capture the main ERM events (realignments, changes in the fluctuations bands and speculative pressures). Fourth, we apply the indicators to the experience of the new, modified ERM linking the currencies of non-euro area Member States to the euro, showing the relevance of this approach in the near future with the enlargement of the European Union.

Keywords: Credibility, Target zones, European Monetary System

JEL Classification: C22, F31, F33

Suggested Citation

Ledesma Rodríguez, Francisco J. and Navarro Ibáñez, Manuel and Pérez Rodríguez, Jorge and Sosvilla-Rivero, Simon, Assessing the Credibility of a Target Zone: Evidence from the EMS (June 2003). Centra Working Paper E2003/33. Available at SSRN: https://ssrn.com/abstract=283193 or http://dx.doi.org/10.2139/ssrn.283193

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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