Imperfect credibility and risk premia in the European Monetary System

The paper deals with the estiamation of models for the expected rate of depreciation within the currency bands of the French franc and the Italian lira against the deutshmark, both unconditional and conditional upon no realignment, as well as the estimastion of models for risk premia. Using these estimates,estimates are constructed for the expected rate of depreciation, the expected rate of realignment and the expected rate of devaluation of these exchange rates during their EMS period by appropriate adjustment of interest rate differentials. It is found that these adjustments are of non-trivial magnitude.