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Testing the Credibility of Belgium's Exchange Rate Policy

Author

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  • Ioannis Halikias

    (International Monetary Fund)

Abstract

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, appears 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, by modeling inflationary expectations, and concludes that long-run exchange rate credibility cannot be rejected from 1990 onward.

Suggested Citation

  • Ioannis Halikias, 1994. "Testing the Credibility of Belgium's Exchange Rate Policy," IMF Staff Papers, Palgrave Macmillan, vol. 41(2), pages 350-366, June.
    • Handle: RePEc:pal:imfstp:v:41:y:1994:i:2:p:350-366
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    Citations

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    Cited by:

    1. Tronzano, Marco & Psaradakis, Zacharias & Sola, Martin, 2003. "Target zone credibility and economic fundamentals," Economic Modelling, Elsevier, vol. 20(4), pages 791-807, July.
    2. Frömmel, Michael & Kruse, Robinson, 2015. "Interest rate convergence in the EMS prior to European Monetary Union," Journal of Policy Modeling, Elsevier, vol. 37(6), pages 990-1004.
    3. M. Araceli Rodríguez López, "undated". "Variables fundamentales o ataques "Self-fulfilling"? Una explicación a las crisis de credibilidad de la peseta espanola," Studies on the Spanish Economy 90, FEDEA.
    4. Daniel Ryan, 1998. "Optimum government credibility in an open-economy fiscal expansion," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 4(4), pages 305-317, November.
    5. Ur Rehman, Mobeen & Al Rababa'a, Abdel Razzaq & El-Nader, Ghaith & Alkhataybeh, Ahmad & Vo, Xuan Vinh, 2022. "Modelling the quantile cross-coherence between exchange rates: Does the COVID-19 pandemic change the interlinkage structure?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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