Barro, Robert J., and David B. Gordon, “Rules, Discretion and Reputation in a Model of Monetary Policy,” Journal of Monetary Economics, Vol. 12 (July 1983), pp. 101–121.
Caramazza, Francesco, “French–German Interest Rate Differentials and Time– Varying Realignment Risk,” Staff Papers, International Monetary Fund, Vol. 40 (September 1993), pp. 567–83.
Cukierman, Alex, “Fixed Parities Versus a Commonly Managed Currency and the Case Against’ Stage Two’” (unpublished; Tel Aviv University, June 1990).
Driffill, John, and Marcus Miller, “Learning and Inflation Convergence in the ERM,” Economic Journal, Vol. 103 (March 1993), pp. 369–78.
Flood, Robert, and Peter Isard, “Simple Rules, Discretion and Monetary Policy,” NBER Working Paper 2934, National Bureau of Economic Research (April 1989).
Giavazzi, Francesco, and Marco Pagano, “The Advantage of Tying One’s Hands: EMS Discipline and Central Bank Credibility,” European Economic Review, Vol. 32 (June 1988), pp. 1055–75.
Koen, Vincent R., “Testing the Credibility of the Belgian Hard Currency Policy,” IMF Working Paper 91/79 (Washington: International Monetary Fund, 1991).
Krasker, William S., “The Peso Problem’ in Testing the Efficiency of Forward Exchange Markets,” Journal of Monetary Economics, Vol. 6 (April 1980), pp. 269–76.
Lucas, Robert E., Jr., “Econometric Policy Evaluation: A Critique,” Journal of Monetary Economics 1, Supplementary Series (1976), pp. 19–46.
Radaelli, Giorgio, “EMS Stability, Capital Controls, and Foreign Exchange Market Intervention,” Greek Economic Review, Vol. 10, No.1 (1988), pp. 133–61.
Svensson, Lars E.O., “The Simplest Test of Target Zone Credibility,” Staff Papers, International Monetary Fund, Vol. 38 (September 1991), pp. 655–65.
Vickers, John, “Signalling in a Model of Monetary Policy with Incomplete Information,” Oxford Economic Papers, Vol. 38 (November 1986), pp. 443–55.
Ioannis Halikias, an Economist in the European I Department, holds an M.Phil. in economics from Yale University. The author thanks Francesco Caramazza, Paul Masson, and Hari Vittas for helpful comments and Susan Becker for research assistance.
However, uncertainty over the constitutional future of Belgium, and the related recent proposals to allocate the central government debt to the regional governments could be relevant sources of credit risk. For a discussion of these issues, see the central bank’s views as reported in the Belgian daily L’Echo (1992).
A rise in COMP signifies an improvement in relative competitiveness.
The results are not affected if the COMP variable is replaced by the Belgian– German ratio of the level of competitiveness, as defined by the respective real effective exchange rate indices.
On the other hand, Radaelli’s (1988) study of European onshore–offshore interest rates, suggesting that the markets have been reasonably accurate in forecasting the timing of realignments, can be interpreted as an indication that the bias resulting from the peso problem may have been rather small. Also, Dornbusch (1989) points to the flatness of the yield curve, which became inverted for many EMS countries, including Belgium, after 1990, as evidence that the peso problem may not he substantial.
The timing of the attainment of exchange rate credibility coincides almost exactly with the announcement of the “franc fort” policy.
The relevant results are available from the author upon request.