Testing the Credibility of the Belgian Hard Currency Policy

August 1, 1991

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Format: Chicago

Vincent Koen. Testing the Credibility of the Belgian Hard Currency Policy, (USA: International Monetary Fund, 1991) accessed November 23, 2024

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

Interest rate differentials have been widely used to assess the degree of policy credibility. A problem with this measure, however, is that the relationship between the differential and credibility varies not only across maturities but also with the actual level of the exchange rate. The alternative approach used in this paper, based on the construction of rate-of-return bands, overcomes this difficulty. It is applied to Belgium, which in May 1990 hardened its exchange rate policy stance. Comparisons with other small, open European economies are carried out. Econometric evidence is provided supporting the claim that the announcement and active implementation of a tighter exchange rate link does make a difference.

Subject: Currencies, Economic and financial statistics, Exchange rates, Financial services, Financial statistics, Foreign exchange, Long term interest rates, Money, Public debt

Keywords: Band vis-à-vis, Currencies, Danish krone, Debt ratio, Deutsche mark rate, Exchange rates, Financial statistics, Inflation differential, Interest rate, Interest rate differential, Long term interest rates, Mechanism of the EMS, Short term exchange rate volatility, Vis-à-vis Germany, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1991/079
Stock No:

WPIEA0791991
ISBN:

9781451850147
ISSN:

1018-5941

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