NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Expected and Predicted Realignments: The FF/DM Exchange Rate During the EMS

Andrew K. Rose, Lars E.O. Svensson

NBER Working Paper No. 3685 (Also Reprint No. r2007)*
Issued in October 1995
NBER Program(s):   ITI    IFM

An empirical model of time-varying realignment risk in an exchange rate target zone is developed. Expected rates of devaluation are estimated as the difference between interest race differentials and estimated expected rates of depreciation within the exchange rate band, using French Franc/Deutsche Mark data during the European Monetary System. The behavior of estimated expected rates of depreciation accord well with the theoretical model of Bertola-Svensson (1990) . We are also able to predict actual realignments with some success.

*Published: Scandinavian Journal of Economics, Vol. 97, No. 2 (1995), 173-200

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