The Stabilizing Effect of the ERMon Exchange Rates and Interest Rates: An Empirical Investigation

August 1, 1993

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper applies nonparametric test procedures to test for a shift in the volatility of nominal and real exchange rates for ERM members and nonmembers. The results imply a reduction in volatility for the ERM members, especially during the second half of the period of operation of the ERM. We also demonstrate that this enhanced stability was not bought at the expense of increased interest rate volatility. The issue of interest rate volatility during sterling’s participation in the ERM is also examined.

Subject: Currencies, Exchange rates, Foreign exchange, Money, Nominal effective exchange rate, Real effective exchange rates, Real exchange rates

Keywords: Currencies, ERM country, ERM currency, ERM effect, ERM membership, exchange rate volatility, Exchange rates, Global, interest rate volatility, Nominal effective exchange rate, Real effective exchange rates, Real exchange rates, trade flow, U.K. sterling, U.S. dollar, WP

Pages:
30
Volume:
1993
DOI:
https://doi.org/10.5089/9781451848854.001
Issue:
067
Series:
Working Paper No. 1993/067
Stock No:
WPIEA0671993
ISBN:
9781451848854
ISSN:
1018-5941

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Notes

Also published in Staff Papers, Vol. 41, No. 1, March 1994.

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