Additional evidence on monetary base and interest rate linkages in the EMS

Conclusion This note has examined interest rate and monetary base linkages within the EMS. Cointegration tests suggest the existence of a long-run equilibrium relationship between German and other EMS interest rates and German and other EMS country monetary bases in a number of cases. Bivariate VAR analysis suggested that Granger causality with respect to EMS interest rate linkages stemmed either from German to European markets or was bi-directional and that the monetary base linkages were overwhelmingly bi-directional. When allowance is made for the influence of US monetary policy developments, the pattern of Granger causality within the EMS is predominantly bi-directional. These findings may be attributable to integrated financial markets and the discipline of a formal exchange rate mechanism. Thus, our results fail to support the hypothesis that German monetary policy plays a dominant and independent role within the EMS. Rather, they suggest that monetary policies in the EMS mainly respond to each other and, to a very limited extent, to developments in US monetary policy.     

Generalized purchasing power parity and the case of the European Union as a successful currency area

This article uses multicountry purchasing power parity (PPP) tests to study the success of the European monetary system (EMS) in creating a successful currency area for a stable European monetary union. If the EMS has sufficiently integrated the fundamentals within the European Union, then real exchange rates between member countries will share a common stationary trend when denominated by a common outside currency. Previous research using two-country PPP tests have been inadequate in explaining the nonstationary nature of real exchange rates between the EMS countries and nonmember countries. The use of generalized PPP tests can show that even though individual exchange rates within the EMS may appear to be nonstationary with respect to outside countries, some of them will combine to form a currency union with a stable stationary trend.     

German dominance in the European Monetary System: Evidence from money supply growth rates

This paper presents further evidence on ostensible German dominance in the European Monetary System (EMS). A dynamic system of equations is built explaining money growth rates as a function of the EMS countries' money growth rates, the world money growth rate, exchange rate objectives, inflation rates, and real income growth rates. A test of German dominance based upon money growth rates is a test of the hypothesis that the EMS has increased the comovements of money demand between countries in the system. It is found that German independence holds, but other central banks can also be important players in the system in that they can conduct independent monetary policies. Monetary policies in the EMS are best characterized as interactive. Therefore, the strict German dominance hypothesis is rejected. It follows that the EMS has not increased significantly the link between money demand functions in the EMS countries in the hierarchical structure as claimed by the dominance argument.     

Simple credibility tests of the ERM bands for the pound sterling and the Italian lira

This article presents evidence that the European Monetary System (EMS) bands for the Italian lira and the pound sterling were not credible for most of the period 1990–1992, and especially during the week prior to their withdrawal from the EMS system. Using a simple test, developed by Svensson, domestic interest rates for both Italy and the United Kingdom have been found to be mostly outside the rate-of-return bands implied by the official arrangements of the EMS target zone system. Furthermore, comparing implied forward rates for various maturities with the official EMS bands of both currencies, we again found that the followed monetary policies in both countries were not in general consistent with those needed to maintain an orderly functioning of the (EMS) system. The Svensson test can further be used as an indicator of potential speculative attacks on an EMS currency, and, in turn, as a signal of an emerging need to adjust the corresponding country's monetary policy.     

EMS企业供应链成本管理

EMS企业的供应链成本管理是其保持成本领先优势的关键。本文通过对EMS企业供应链成本的构成分析,指出目前我国EMS企业在供应链成本管理方面存在的问题,并据以提出如何改进我国EMS企业供应链成本管理,有效提高我国EMS企业竞争力的措施。     

On the feasibility of a regional exchange rate system for East Asia: Lessons of the 1992/1993 EMS crisis

This paper argues that a regional exchange rate system such as the EMS should not be ruled out when discussing monetary options for East Asia. The paper recalls that the 1992/1993 EMS crisis was the crisis of an exchange rate system and not just the collapse of unilateral pegs pursued by individual countries. It discusses distinct features that add to the credibility of regional exchange rate systems and reasons that a system that is built around well-defined rules and which is managed very carefully and cooperatively according to those rules could be both credible and sustainable even in the 21st century.     

Common stochastic trends and inflation convergence in the EMS

Common Stochastic Trends and Inflation Convergence in the EMS. — This article seeks to clarify the relationship between the concept of convergence and univariate and cointegration analysis by looking at inflation convergence within the EMS. We take issue with the view put forward by Artis and Nachane, who hold that cointegration of inflation in Germany with inflation in the other EMS countries is a necessary condition for the “german leadership” thesis to stand. We think that, on the contrary, as long as convergence is still in the process of being achieved, inflation differentials are likely to be non-stationary and, if so, to exhibit common stochastic trends. However, our empirical results, based on Phillips-Perron tests and on the maximum likelihood framework developed by Johansen to test for common trends and cointegration, confirm the validity of the German leadership hypothesis.     

The stability of money demand in Germany and in the EMS: Impact of German unification

The Stability of Narrow Money Demand in Germany and Aggregate Money Demand in the EMS: Impact of German Unification. —This paper shows that the German monetary union not only had an impact on the stability of the narrow money demand in Germany but also on the stability of the aggregate demand for money in two larger European currency areas, consisting of three and seven EMS countries. However, the impact was only of a temporary nature. The empirical results show that the close link between real money, output, and the interest rate still exists. In a European Monetary Union, narrow money thus remains a potential candidate as an indicator and/or intermediate target for the European Central Bank.     

The French commitment to European monetary integration: A review of the two EMS crises (1981–83, 1992–93)

This paper focuses on the process of exchange rate management during the two European Monetary System(EMS) crises, in 1981–83 and 1992–93, and examines the factors which led the French governments to adhere to the EMS. France's strong franc (franc fort) policy is a useful test case for maintaining national commitment to European monetary integration. The origin of the franc fort policy can be traced back to the exchange rate crisis of 1981–83. By actively supporting European institutions and emphasizing the emergence of a strong and united European common currency, France discovered the way to bolster confidence in her economic policy. Beyond this focal point, political justification and economic rationality became mutually reinforcing, configuring French national preference in European monetary integration. The response of the French government to the EMS crisis of 1992–93 was more consistent compared to the response to the 1981–83 crisis, and reflected the accumulation of loyalty to European monetary integration. This loyalty, however, was made neither from purely economic calculation nor out of normative commitment French European monetary policy reflected the interaction between domestic politics and European monetary integration. The French commitment to the franc fort also was based on domestic political bases such as the existence of a core policy group, a centralized policy‐making structure, and an issue linkage between the franc fort and European integration.     

Excess returns in the EMS: Do “weak” currencies still exist after the widening of the fluctuation bands?

Excess Returns in the EMS: Do “Weak” Currencies Still Exist after the Widening of the Fluctuation Bands? — The authors analyze the issue of how the different institutional arrangements within the ERM have affected the behaviour of excess returns on DM-denominated assets and contribute to the debate on the future of the EMS. Their approach consists in estimating simple forecasting models for interest differentials, and testing for the presence of significant (negative) mean prediction errors. The comparison between predicted and actual outcome indicates that the new system might be characterized by the virtual disappearance of “weak” currencies, as the widening of the bands has removed the expectations of realignments which resulted in high interest differentials.     

Target zones and exchange rate management: A stability analysis of the European Monetary System

Since the creation of the EMS in 1979 and the Louvre Accord in 1987, economists and policy makers have debated whether exchange rate management can actually secure better economic performance. This paper supplies some empirical evidence to help answer that question in the context of an environment free of unanticipated shocks. Our results identify the important design characteristics of a target zone or EMS type system focusing on the width of the bands, the length of time between realignments, and the choice of exchange rate parity. Secondly we examine the popular conservation of variance theory: that reducing exchange rate instability will just cause greater instability in the underlying monetary controls. Finally we produce evidence to support the claim that the method of exchange rate management is important because gross or persistent misalignments cause large welfare losses whereas moderate misalignments would impose only small costs. Work on the EMS relative robustness to shocks is under way.     

Effect of exchange rate risk on intra-EC trade

Summary The smooth development of the EMS towrds an exchange rate system with fixed exchange rates among its member countries recently came to an abrupt (temporary) end. This raises the question whether exchange rate volatility is damaging to international trade. So far, it has remained an open empirical question whether exchange rate variability has the presumed negative effects. This article shows that the exports of five countries participating in the ERM have substantially benefited from the diminische exchange rate risk in the period from 1979 up to and including 1990. Contrary to former empirical studies, which deal with figures for total trade or total trade or total manufactures, the analysis here has been conducted for exports broken down by type of product. The study suggests that a more disaggregated analysis, with respect to products or sectors, might be a fruitful way of identifying the effects of exchange rate volatility on international trade.     

Asymmetric monetary policies? the case of Germany and France

How dissimilar are the policy objectives of the Bundesbank and the Banque de France and have those objectives converged since the conception of the EMS? We address these questions by estimating objective functions for the flexible-exchange-rate and the EMS periods. Vector autoregressions are used to characterize the economic environment and an inverse control methodology is used to infer the objectives of the central banks. We find that the Bundesbank's policy actions are compatible with its having consistently placed a high weight on the objective of price stability. The Banque de France on the other hand appears to have considered output stability to be an important target in the early EMS period. After a major French policy shift in 1982 the objectives of two Central Banks appear to be quite similar.     

Is there a “triffin dilemma” for the EMS?

The question explored in this paper is whether the EMS can continue to perform efficiently and ensure low inflation in an economically and financially integrated area with a high degree of currency substitution. A dilemma may arise: on the one hand, currency substitution should be accommodated to provide market participants with the currency they desire; on the other, currency substitution should not determine an excess of liquidity in the system leading to inflation. These objectives might be difficult to reconcile in a system with decentralized asymmetric monetary policy cooperation such as the EMS and might have adverse consequences for the monetary stability of the system.     

The Collapse of the ‘New EMS’: An Interpretation

Existing theoretical models cannot explain the following features of the EMS and its crisis in 1992: its progressive hardening from 1987 onwards; the fact that credibility was shared the progressive deterioration of credibility after the first Danish referendum without changes in the economic fundamentals. This paper argues that the reason lies in the fact that the literature has not accounted for the changes in the perceived prospects of EMU. We show that an adjustable peg regime that incorporates these prospects can explain the three features listed above.     

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

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.     

Exchange rate and interest rate polarization

Exchange Rate and Interest Rate Polarization. - The relationship between the polarization phenomenon in foreign exhange markets and a similar regu-larity in interest rate differentials is considered. In the case of perfect substitutability and of perfect foresight, both polarizations would be perfectly complementary. Risk premia and forecast errors, however, might induce some degree of substitutability between the two concepts. Throughout almost the entire EMS experience, in France and Italy both phenomena appear to be equivalent. At the end of the 80s, however, interest rate polarization has surged at the expense of exchange rate polarization. In fact, a bias in estimates was found to explain this recent behaviour.     

Forward rates and spot rates in the European monetary system — Forward market efficiency

Conclusions Our empirical investigation of forward and spot rates in the European Monetary System in comparison to flexible exchange-rate regimes provides the following results. Unit root tests reveal that forward rates and spot rates are best described by random walks for all six exchange rates under consideration. This indicates that even in the EMS, exchange rates behave in an unpredictable way and exchange-rate variability is relatively high. Applying cointegration theory to the forward rate and the future spot rate, we find that these two time series are cointegrated in the EMS and in flexible exchange-rate systems. There exists a stable linear relationship between the forward rate and the future spot rate which implies that a necessary condition for forward market efficiency is fulfilled. We find the forward rate to be a poor predictor of the future exchange rate. It predicts the sign of the future exchange-rate change correctly except for the guilder, but explains only a small fraction of the change. Concerning forward market efficiency, the single hypothesis, H₀: β₁ = 1, for EMS and non-EMS exchange rates was found to be rather robust. The joint hypothesis for forward market efficiency, H₀: α₁ =0, β₁ = 1, could be rejected for the EMS exchange rates but not for the flexible exchange rates. Thus, a sufficient condition for forward market efficiency is violated in the case of the EMS while it holds for the flexible exchange rates.

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Zusammenfassung Terminkurse und Kassakurse im Europ?ischen W?hrungssystem. Zur Effizienz der Terminm?rkte. — Die Verfasser untersuchen für die Periode 1979–89 das Verhalten der Termin- und Kassakurse im EWS im Vergleich zum System flexibler Wechselkurse. Die „random-walk“-Hypothese für Termin- und Kassakurse kann weder für floatende noch für EWS-Wechselkurse verworfen werden. Kointegrationstests ergeben eine stabile Beziehung zwischen Termin- und Kassakursen, was eine notwendige Bedingung für die Effizienz der Terminm?rkte ist. Eine hinreichende Bedingung für effiziente Terminm?rkte, die sich aus einem von Fama vorgeschlagenen Verfahren ergibt, ist zwar für flexible Wechselkurse erfüllt, nicht aber für das EWS.

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Résumé Les cours du change à terme et les cours au comptant dans le système monétaire européen (SME): L’efficience du marché à terme. — Cette étude analyse pour la période 1979—89 le comportement des cours du change à terme et des cours au comptant dans le SME en comparaison des cours du change flexibles. L’hypothèse de ?random-walk? pour les cours du change à terme et les cours au comptant ne peut pas être réjetée, ni pour les cours flottants ni pour les cours dans le SME. Les tests de cointégration rélèvent une relation stable entre les cours du change à terme et ceux au comptant ce qui est une condition nécessaire pour l’efficience du marché à terme. Une condition suffisante, donnée par une procédure proposée par Fama, est satisfaite pour les cours du change flexibles, mais pas pour le SME.

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Resumen Tasas a término y spot en el sistema monetario europeo. La eficiencia del mercado a término. — En este trabajo se investiga el comportamiento de las tasas a término y spot en el sistema monetario europeo (EMS) en comparación con los regimenes de cambios flexibles de 1979 a 1989. La hipótesis del “random walk” para tasas a término y spot no puede ser rechazada, ni para tasas de cambio flexibles ni para tasas de cambio del EMS. Tests de cointegración revelan una relación estable entre las tasas a término y spot, la cual es una condición necesaria para la eficiencia del mercado a término. Una condición suficiente para la eficiencia del mercado a término, dada por el procedimiento sugerido por Fama, es satisfecha para las tasas de cambio flexibles, mas no para las del EMS.

     

Divergence indicators and the volatility smoothness in semi-fixed exchange rate regimes

Divergence Indicators and the Volatility Smoothness in Semi-Fixed Exchange Rate Regimes. —Fixed or semi-fixed exchange rate regimes have volatility paths that are in general less smooth than their free floating counterpart. Moreover, there tends to be a correlation between the lack of smoothness and the weakness of the currency. In this article, the effects of divergence from central parity on the smoothness of the volatility are discussed within the framework of a TGARCH model. It is shown that, for various EMS rates, the divergence indicator has a statistically significant effect on the smoothness of the volatility path.     

Price movements in The Netherlands and Germany and the guilder-Dmark peg

Summary This article examines the long-run, relationship between Dutch and German consumer prices during the period 1961–1991. Two hypotheses are examined. The first deals with the ultimate objective of the guilder-Dmark peg and the second is whether Dutch and German prices are cointegrated. Accounting for an exogenous structural changes related to the estableshment of the EMS, the empirical evidence supports both hypotheses. Moreover, the analysis indicates that two-thirds of the reduction of the structural inflation rate in the Netherlands from 6.6% during the pre-EMS period to 3.0% afterwards can be attributed to the policy shift in 1979.