Regimen Changes and Duration in the European Monetary System

FEDEA Int. Economics & Finance DEFI Working Paper No. 02-05

31 Pages Posted: 24 Jul 2002  

Simon Sosvilla-Rivero

Complutense Institute for International Studies

Reyes Maroto Illera

Foundation for Applied Economic Research (FEDEA)

Date Written: June 2002

Abstract

This paper examines the regime changes in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS), applying the duration model approach to weekly data of eight currencies participating in the ERM, covering the complete EMS history. When using the non-parametric (univariate) analysis, we found that for those regimens with long durations, the ERM would have been relatively stable, while for the (more common) regimes associated with short durations would have been more unstable. The probability of maintaining a certain regime is estimated to be 0.685. When applying a parametric (multivariate) analysis to investigate the role of other variables in the probability of a regime change, we conclude that the interest rate differential with Germany and the magnitude of the realignment would have negatively affected the duration of a given regime, while credibility would have positively influenced such duration. Finally, when distinguishing between groups of currencies, we observe that those in the core are more stable than those in the periphery, obtaining evidence against equality of survival functions among these groups of currencies.

Keywords: Duration models, exchange rates, European Monetary System

JEL Classification: C41, F31, F33

Suggested Citation

Sosvilla-Rivero, Simon and Maroto Illera, Reyes, Regimen Changes and Duration in the European Monetary System (June 2002). FEDEA Int. Economics & Finance DEFI Working Paper No. 02-05. Available at SSRN: https://ssrn.com/abstract=318441 or http://dx.doi.org/10.2139/ssrn.318441

Simon Sosvilla-Rivero (Contact Author)

Complutense Institute for International Studies ( email )

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

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

Reyes Maroto Illera

Foundation for Applied Economic Research (FEDEA) ( email )

Jorge Juan 46
Madrid, 28001
Spain

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