The European Monetary System: Credible at Last?

59 Pages Posted: 7 Aug 2007 Last revised: 10 Jun 2021

See all articles by Jeffrey A. Frankel

Jeffrey A. Frankel

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Steven Phillips

International Monetary Fund (IMF) - Western Hemisphere Department

Date Written: August 1991

Abstract

We update tests of the credibility of the EMS exchange rate target zones. Our main methodological innovation is to use a survey of exchange rate forecasts, as well as interest differentials, in measuring exchange rate expectations. We investigate the hypothesis -- suggested by the apparent stabilization of the EMS and by recent institutional developments -- that the EMS target zones have experienced an increase in credibility since their 1987 realignment. The evidence tends to support this hypothesis for most currencies. We also examine the empirical failure of standard target zone models, but find no evidence that it can be attributed to mismeasurement of expectations. Finally, we consider an alternative credibility measure which captures the importance of possible realignments in overall expectations of exchange rate changes.

Suggested Citation

Frankel, Jeffrey A. and Phillips, Steven, The European Monetary System: Credible at Last? (August 1991). NBER Working Paper No. w3819, Available at SSRN: https://ssrn.com/abstract=473962

Jeffrey A. Frankel (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

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HOME PAGE: http://www.ksg.harvard.edu/fs/jfrankel

National Bureau of Economic Research (NBER)

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Steven Phillips

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

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United States

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