Exchange rate dynamics and currency unification: The Ostmark-DM rate
Received: 15 February 1992 Revised: 15 February 1993 DOI:
Cite this article as: Burda, M. & Gerlach, S. Empirical Economics (1993) 18: 417. doi:10.1007/BF01176196 Abstract
This paper estimates a simple model of the exchange rate between the East and West German Mark immediately preceding German monetary union. Although there is a theoretical literature on exchange rate dynamics when the introduction of a fixed exchange rate is anticipated, the absence of data has limited empirical work on the subject. We show that in the first part of the sample, the DM-Ostmark exchange rate behaves as a random walk. In the second half, when monetary union appeared more likely, the exchange rate behaves as a weighted average of fundamentals and the expected “terminal” exchange rate.
JEL Classification System-Numbers F31 F33 F42
This research was supported by grants from INSEAD's Research Department (Burda), and Bankforskningsinstitutet and the Center for International and Comparative Studies at Brandeis (Gerlach). We thank Susan Collins, Salih Neftçi, Charles Wyplosz and seminar participants at INSEAD, the Graduate Institute of International Studies (Geneva), and Harvard for useful comments and Dean Drysdale for help in collecting the data.
Akgiray V, Booth GG, Seifert B (1988) Distribution Properties of Latin American Black Market Exchange Rates.
Journal of International Money and Finance 7:37–48
Deutsches Institut für Wirtschaftsforschung (DIW) (1986) Das Kaufkraftverhältnis zwischen D-Mark und Mark der DDR.
Deutsche Bundesbank (1990) Technical and Organisational Aspects of the Monetary Union with the German Democratic Republic.
Monthly Report of the Deutsche Bundesbank 42:25–31
Djajic S (1989) Dynamics of the Exchange Rate in the Anticipation of Pegging.
Journal of International Money and Finance 8:559–571
Dornbusch R (1976) Expectations and Exchange Rate Dynamics.
Journal of Political Economy 84:1161–76
Froot K, Obstfeld M (1991) Exchange Rate Dynamics under Stochastic Regime Shifts: A Unified Approach.
Journal of International Economics 31:203–229
Harvey AC (1981)
Time Series Models (Wiley, New York)
Harvey AC (1989)
Forecasting, Structural Time Series Models and the Kalman Filter (Cambridge University Press, Cambridge)
Huizinga H (1991) Law Enforcement and the Black Market Exchange Rate.
Journal of International Money and Finance 10:527–540
Koedijk K, Kool C (1992) Tail Estimates of East European Exchange Rates.
Journal of Business and Economic Statistics 10:83–94
Mussa M (1976) The Exchange Rate, the Balance of Payments, and Monetary and Fiscal Policy under a Regime of Controlled Floating.
Scandinavian Journal of Economics 78:229–248
Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (German Council of Economic Experts) (1990) Zur Unterstützung der Wirtschaftsreform in der DDR: Voraussetzungen und Möglichkeiten. January
Siebert H (1990) The Economic Integration of Germany. Kiel Discussion Paper No. 160, May