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Open Economies Review

, Volume 7, Issue 1, pp 35–59 | Cite as

Fundamentals and devaluation expectations in target zones: Some new evidence from the ERM

  • Pierre L. Siklos
  • Rod Tarajos
Article

Abstract

The credibility of exchange rate target zones for four EMS countries for the period March 1979-September 1992 is examined. Existing methods by Svensson, Edin and Vredin, typically applied to data from the Nordic countries, are considered. On balance, the method suggested by Edin and Vredin provides somewhat better estimates of devaluation probabilities than either of Svensson's methods. While all methods produce reasonably good estimates of the expected size of devaluations, they did not predict the September 1992 EMS crisis. However, we find that electoral and other institutional variables improve estimates of devaluation expectations.

Key words

EMS target zones credibility 

JEL classification

F33 F42 C10 

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Copyright information

© Kluwer Academic Publishers 1996

Authors and Affiliations

  • Pierre L. Siklos
    • 1
  • Rod Tarajos
    • 1
  1. 1.Department of EconomicsWilfrid Laurier UniversityWaterlooCanada

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