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Testing the Credibility of Belgium's Exchange Rate Policy
Author:
Mr. Ioannis Halikias
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Series:
IMF Working Papers
Volume/Issue:
Volume 1993: Issue 076
Language:
English
Publication Date:
01 Oct 1993
DOI:
https://doi.org/10.5089/9781451849790.001
ISBN:
9781451849790
ISSN:
1018-5941
Pages:
40
Keywords:
WP; interest rate; exchange rate; deutsche mark; interest rate differential; exchange rate credibility; inflation differential; U.S. dollar; vis-à-vis Germany; corridor analysis; fluctuation band; Exchange rates; Credit risk; Interest rate corridor; Long term interest rates; Inflation; Western Europe
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper examines the credibility of the exchange rate policy pursued by the Belgian monetary authorities of pegging the Belgian franc to a narrow fluctuation band around the deutsche mark, in the context of the exchange rate mechanism of the European Monetary System. Simple interest rate corridor analysis, based on the Belgian-German long-term interest rate differential and taking explicit account of the currency’s position within its fluctuation band, would appear to suggest that the hypothesis that long-run exchange rate credibility has been attained should be rejected, even though considerable progress has been made in this regard since the early 1980s. The paper proceeds to decompose the Belgian-German interest rate differential into a sovereign credit risk and an exchange rate risk component, via the modelling of inflationary expectations, and concludes that long-run exchange rate credibility cannot be rejected from 1990 onwards.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund