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Credibility or exit speed? Reflections prompted by the 1992 EMS crisis

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  • Annamaria Simonazzi
  • Fernando Vianello

Abstract

A common interpretation of the vicissitudes of the EMS holds that the credibility of EMS parities remained very high at least up to the Danish referendum of June 1992. In contrast, we argue that capital inflows into higher-inflation countries and falling interest differentials can coexist with the expectation of a realignment, provided international investors are confident in their ""exit speed"", i.e. in their ability to close or hedge open positions in good time. The uncovered interest parity is inapplicable, we maintain, to all cases in which the monetary authorities' expected behaviour is such as to justify the aforesaid confidence.

Suggested Citation

  • Annamaria Simonazzi & Fernando Vianello, 1996. "Credibility or exit speed? Reflections prompted by the 1992 EMS crisis," Working Papers in Public Economics 11, University of Rome La Sapienza, Department of Economics and Law.
    • Handle: RePEc:sap:wpaper:wp11
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    References listed on IDEAS

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    More about this item

    Keywords

    EMS; credibility; interest differential.;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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