In search of a credible EMS
In chapter 5 it was empirically documented that the members of the EMS followed, to different degrees, autonomous monetary policies during most of the 1980s. Autonomy would have been immediately reflected in market exchange rates if these had not been repressed and allowed to move only at discrete realignments. Autonomy combined with fixed exchange rates is, however, unsustainable and requires, sooner or later, adjustments in central parities. This was likely mirrored in the lack of credibility of the fixed exchange rates during the period. It was further shown that, after 1987, the behavior of monetary authorities was changed and the degree of monetary autonomy was quite reduced. In principle, this would imply higher credibility of EMS exchange rate bands, unless shifts in policy were expected.
KeywordsExchange Rate Forecast Error Excess Return Forward Rate Recursive Estimate
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