A new indicator to assess the credibility of the EMS

This paper proposes a new credibility indicator for the EMS based on the realignment expectations calculated using the inferred probabilities derived from the estimation of a Markov-switching regimes model. This indicator avoids most of the problems presented by the so-called ‘drift adjusted method’...

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Bibliographic Details
Published in:European economic review 1997-08, Vol.41 (8), p.1511-1535
Main Authors: Gómez-Puig, Marta, Montalvo, JoséG.
Format: Article
Language:English
Subjects:
Central banks
Credibility
Currencies
Devaluation
Econometrics
Economic indicators
Economic models
Economics
Europe
European Monetary System
Exchange Rate Mechanism
Exchange rate policy
Exchange rates
Foreign exchange rates
Indicators
Markov analysis
Markov switching model
Monetary unions
Studies
Target zones
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Summary:This paper proposes a new credibility indicator for the EMS based on the realignment expectations calculated using the inferred probabilities derived from the estimation of a Markov-switching regimes model. This indicator avoids most of the problems presented by the so-called ‘drift adjusted method’ and, in particular, it accounts, in a natural manner, for ‘ex-ante’ expectations instead of using ‘ex-post’ realignment times in order to deal with the jumps in the exchange rates. The periods of high probability of realignment match very closely the crisis of the EMS.
ISSN:0014-2921
1873-572X
DOI:10.1016/S0014-2921(96)00043-8