IMF Working Papers

Expected Devaluation and Economic Fundamentals

By Alun H. Thomas

November 1, 1993

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Format: Chicago

Alun H. Thomas Expected Devaluation and Economic Fundamentals, (USA: International Monetary Fund, 1993) 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

Recent incidents of exchange rate collapse have provoked interest in the extent to which such events are determined by economic fundamentals. This paper considers whether interest rate differentials are appropriate measures of the risk of devaluation and whether this measure of devaluation risk reflects the movements of variables which capture internal and external balance. The paper finds that interest rate differentials reflect devaluation risk but that movements in fundamental variables have only a weak effect on devaluation risk in France and Italy. The most significant influence on devaluation risk is the position of the currency in its band in that the lower is the exchange value of a currency within the band, the greater is the perceived risk of devaluation.

Subject: Currencies, Depreciation, Exchange rate adjustments, Exchange rates, Foreign exchange, Labor, Money, National accounts, Unemployment rate

Keywords: Currencies, Depreciation, Depreciation ceteris paribus, Deutsche mark, Devaluation risk, Exchange rate adjustments, Exchange rates, Expected devaluation, Foreign exchange, Italian lira, Mean reversion, Unemployment rate, WP

Publication Details

  • Pages:

    40

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 1993/083

  • Stock No:

    WPIEA0831993

  • ISBN:

    9781451954517

  • ISSN:

    1018-5941

Notes

Also published in Staff Papers, Vol. 41, No. 2, June 1994.

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