Assessing the Credibility of a Target Zone: Evidence from the EMS
Centra Working Paper E2003/33
44 Pages Posted: 14 Sep 2001
Date Written: June 2003
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: Suggested Citation