TY  - JOUR
AU  - Svensson,Lars E.O.
TI  - Assessing Target Zone Credibility: Mean Reversion and Devaluation       Expectations in the ERM 1979-1992
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3795
PY  - 1994
Y2  - January 1994
UR  - http://www.nber.org/papers/w3795
L1  - http://www.nber.org/papers/w3795.pdf
N1  - Author contact info:
Lars E.O. Svensson
Sveriges Riksbank
SE-103 37 Stockholm
SWEDEN
Tel: +46 8 787 0107
Fax: +46 8 21 0531
E-Mail: lars.svensson@iies.su.se
AB  - The paper presents estimates of devaluation expectations for six EMS currencies relative to the Deutsche mark, for the period March 1979-May 1990. The estimation method is simple and operational, and consistently generates sensible results. The estimates are constructed by the adjusting interest rate differentials by subtracting estimated expected rates of depreciation within the exchange rate band. The adjustment is nontrivial because exchange rates within ERM bands display mean reversion rather than random walk (unit root) behavior. The adjustment is essential since expected rates of depreciation within the band are usually of about the same magnitude as interest rate differentials.
ER  -