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Devaluation expectations and the unit root hypothesis: The Italian Lira in the European monetary system

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Summary

In several studies the unit root hypothesis of EMS exchange rates is analysed within the context of devaluation expectations estimation. By means of bootstrap inference it is shown that these procedures are not compatible with standard Dickey-Fuller significance levels and may lead to a wrong rejection of the null hypothesis. In the case of the Italian Lira/Deutsche Mark exchange rate, the hypothesis of a unit root is not rejected and expectations can be modelled by means of a reflected Brownian motion. The estimated devaluation expectations are related with some macro variables which provide evidence for the structure of expectations.

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Authors and Affiliations

  1. Dipartimento di Scienze Statistiche, Università degli Studi di Bologna, Via delle Belle Arti 41, 40126, Bologna, Italy

    Giuseppe Cavaliere

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  1. Giuseppe Cavaliere
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This research has been partially supported with 40% and 60% MURST grants. The author wishes to thank the Bank of Italy for the exchange rates and the interest rates data and Ulf Söderström for providing macroeconomic indicators. Useful suggestions from Riccardo Cesari, Michele Costa and two anonymous referees are gratefully acknowledged.

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Cavaliere, G. Devaluation expectations and the unit root hypothesis: The Italian Lira in the European monetary system. J. It. Statist. Soc. 5, 39–71 (1996). https://doi.org/10.1007/BF02589582

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