Exchange Market Pressures and Speculative Capital Flows in Selected European Countries

February 1, 1994

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Format: Chicago

Ceyla Pazarbasioglu, and Inci Ötker. Exchange Market Pressures and Speculative Capital Flows in Selected European Countries, (USA: International Monetary Fund, 1994) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper estimates a speculative attack model of currency crises in an attempt to identify the roles of macroeconomic fundamentals and speculative market pressures in the recent crisis, as well as earlier devaluations in adjustable fixed exchange rate systems in the European currency markets. For a sample of five countries, including Denmark, Ireland, Spain, Norway, and Sweden, our empirical analyses show that both economic fundamentals and speculative factors have a significant influence on the probability of devaluations. The recent experience in the European foreign exchange markets suggests that the latest realignments are mainly the result of foreign exchange market tensions amidst the growing conflict between the needs of the domestic economies and the policies needed to maintain fixed exchange rates. Our results confirm that regardless of the source of the deterioration in economic conditions, market participants perceived the existing parities of the currencies in these five countries as inconsistent with their underlying economic fundamentals, thus effectively bringing about either a realignment or a modification of the exchange arrangement.

Subject: Conventional peg, Currencies, Currency markets, Exchange rate arrangements, Exchange rates, Financial markets, Foreign exchange, International reserves, Money

Keywords: Adjustable peg, Basket index, Central bank, Conventional peg, Crisis model, Currencies, Currency float, Currency markets, Deutsche mark, Devaluation probability, ERM currency, Europe, Exchange rate arrangements, Exchange rates, Interest rate, Italian lira, Norwegian krone, Price level, Shadow exchange rate, Swedish krona, WP

Publication Details

Pages:

72
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1994/021
Stock No:

WPIEA0211994
ISBN:

9781451921571
ISSN:

1018-5941

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