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Assessing Target Zone Credibility: Mean Reversion and Devaluation Expectations in the EMS
Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies.
1991 (English)Report (Other academic)
Abstract [en]

The paper presents estimates of devaluation expectations for six EMS currencies relative to the Deutsche mark, for the period March 1979-May 1990. The estimation method is simple and operational, and consistently generates sensible results. The estimates are constructed by the adjusting interest rate differentials by subtracting estimated expected rates of depreciation within the exchange rate band. The adjustment is nontrivial because exchange rates within ERM bands display mean reversion rather than random walk (unit root) behavior. The adjustment is essential since expected rates of depreciation within the band are usually of about the same magnitude as interest rate differentials.

Place, publisher, year, edition, pages
Stockholm: IIES , 1991. , 37 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 493
Keyword [en]
exchange rate, target zone, realignment, devaluation, European Monetary System, unit root, mean reversion
National Category
URN: urn:nbn:se:su:diva-41799OAI: diva2:337789
Available from: 2010-08-09 Created: 2010-08-09 Last updated: 2010-08-09Bibliographically approved

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Svensson, Lars E.O.
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