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Intertemporal Balance, Sustainability and Efficiency of the Exchange Rate Mechanism

Author

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  • Yan, Ho-don

    (Feng-Chia University)

Abstract

Under the assumption that the balance of payments must satisfy the expected intertemporal balance, this paper seeks to establish a pre-condition for a crisis of the Exchange Rate Mechanism (ERM). Proposing that non-stationarity of the growth rate of assets is evidence of a violation of expected intertemporal bal - ance, we calculate Augmented Dickey-Fuller statistics of the growth rate of for - eign exchange reserves prior to the ERM crisis in September, 1992 for member states. In all, but one, of the crisis experiences, there is no evidence of a violation of intertemporal balance prior to the month of the crisis. However, the persistent violation of intertemporal balance by Italy prior to the crisis reflects that the fun - damental disequilibrium matters to the viability of the ERM. With no evidence of ef ficient allocation of the foreign reserves within the member states, the ERM is exposed to attack by speculators.

Suggested Citation

  • Yan, Ho-don, 1998. "Intertemporal Balance, Sustainability and Efficiency of the Exchange Rate Mechanism," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 13, pages 292-310.
    • Handle: RePEc:ris:integr:0076
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    More about this item

    Keywords

    Intertemporal; Balance;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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