TY  - JOUR
AU  - Collins,Susan M.
TI  - The Expected Timing of EMS Realignments: 1979-83
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4068
PY  - 1992
Y2  - May 1992
UR  - http://www.nber.org/papers/w4068
L1  - http://www.nber.org/papers/w4068.pdf
N1  - Author contact info:
Susan M. Collins
Joan and Sanford Weill Dean of Public Policy
Gerald R. Ford School of Public Policy
Weill Hall, Suite 4300
735 South State Street
Ann Arbor, MI   48109-3091
Tel: 734-763-2258
Fax: 734-763-9181
E-Mail: smcol@umich.edu
AB  - This paper develops and estimates a model of the time at which market participants expected the French franc to be devalued relative to the German deutschemark during the early years of the European Monetary System. The model assumes that the expected time of exchange rate realignment is determined by the time at which foreign exchange reserves in the Banque de France first fall below a critical threshold level, and that reserves are a Brownian motion process with a drift that depends on current economic conditions. Thus, the probability distribution for the time of the next realignment is an Inverse Gaussian distribution. The empirical analysis uses the term structure of forward exchange rate premia to form indicators of perceived probabilities of realignment over various time horizons. The model fits quite well, especially prior to the March 1983 realignment. The estimation suggests that the expected timing of realignments was quite sensitive to the level of reserves in France and to factors that affect the mean rate of change of reserves.
ER  -