Monetary Authorities’ Reaction Functions in a Model of Exchange-Rate Determination for the European Monetary System



The purpose of this study1 is to provide an econometric analysis of monetary authorities’ reaction functions capable of accounting for that part in the process of exchange-rate determination which is generally left exogenous in the recent literature. While our aim is therefore to improve on the current state of exchange-rate analysis, the occasion for this research and our main empirical interest in it originate from the need to account for the determination of the exchange rates of the major European currencies, particularly those that have operated under the institutional constraints of the European Monetary Agreement in the seventies (the European ‘snake’) and of the European Monetary System since 1979.


Exchange Rate Interest Rate Monetary Policy Real Exchange Rate Reaction Function 
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© Paul De Grauwe and Theo Peeters 1983

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