The Determinants of Realignment Expectations Under the EMS: Some Empirical Regularities

38 Pages Posted: 6 Jul 2004 Last revised: 25 Mar 2021

See all articles by Zhaohui Chen

Zhaohui Chen

International Monetary Fund (IMF)

Alberto Giovannini

Columbia University - Columbia Business School

Date Written: March 1993

Abstract

The stability of the EMS depends crucially on realignment expectations of the market participants. In this paper we discuss how to measure such expectations and how to relate them to economic fundamentals, central bank reputation, and institutional arrangements of the EMS. We find the following empirical regularities for FF/DM and IL/DM exchange rates: (1) expected devaluations are positively related to the current exchange rate deviation from the central parity; (2) expected devaluations are negatively related to the length of time since last realignment in the short and medium run; (3) the Basle-Nyborg agreements seem to have a stabilizing effect for both currencies examined, albeit through different channels; (4) large revaluation expectations occur immediately after devaluations. (1) and (4) are not inconsistent with the hypothesis of over-speculation or market inefficiency.

Suggested Citation

Chen, Zhaohui and Giovannini, Alberto, The Determinants of Realignment Expectations Under the EMS: Some Empirical Regularities (March 1993). NBER Working Paper No. w4291, Available at SSRN: https://ssrn.com/abstract=315986

Zhaohui Chen (Contact Author)

International Monetary Fund (IMF) ( email )

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Alberto Giovannini

Columbia University - Columbia Business School ( email )

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