Post by Sapphire Capital on Sept 10, 2008 8:13:57 GMT 4
Political and Institutional Factors in Regime Changes in the ERM: An Application of Duration Analysis
Simón Sosvilla-Rivero
Foundation for Applied Economic Research (FEDEA); Complutense University of Madrid
Francisco Pérez-Bermejo
KPMG-Spain
World Economy, Vol. 31, Issue 8, pp. 1049-1077, August 2008
Abstract:
This paper analyses the functioning of the European Exchange Rate Mechanism (ERM). To that end, we apply duration models to estimate an augmented target-zone model, explicitly incorporating political and institutional factors into the explanation of European exchange rate policies. The estimations are based on quarterly data of eight currencies participating in the ERM, covering the complete history of the European Monetary System. Our results suggest that both economic and political factors are important determinants of ERM currency policies. Concerning economic factors, the money supply, the real exchange rate, the interest rate in Germany and the central parity deviation would have negatively affected the duration of a given central parity, while credibility and the price level in Germany would have positively influenced such duration. Regarding political variables, elections, central bank independence and left-wing administrations would have increased the probability of maintaining the current regime, while unstable governments would have been associated with more frequent regime changes. Moreover, we show how the political augmented model outperforms the model which just incorporates pure economic determinants, both in terms of explanatory power and goodness of fit.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1245626
Simón Sosvilla-Rivero
Foundation for Applied Economic Research (FEDEA); Complutense University of Madrid
Francisco Pérez-Bermejo
KPMG-Spain
World Economy, Vol. 31, Issue 8, pp. 1049-1077, August 2008
Abstract:
This paper analyses the functioning of the European Exchange Rate Mechanism (ERM). To that end, we apply duration models to estimate an augmented target-zone model, explicitly incorporating political and institutional factors into the explanation of European exchange rate policies. The estimations are based on quarterly data of eight currencies participating in the ERM, covering the complete history of the European Monetary System. Our results suggest that both economic and political factors are important determinants of ERM currency policies. Concerning economic factors, the money supply, the real exchange rate, the interest rate in Germany and the central parity deviation would have negatively affected the duration of a given central parity, while credibility and the price level in Germany would have positively influenced such duration. Regarding political variables, elections, central bank independence and left-wing administrations would have increased the probability of maintaining the current regime, while unstable governments would have been associated with more frequent regime changes. Moreover, we show how the political augmented model outperforms the model which just incorporates pure economic determinants, both in terms of explanatory power and goodness of fit.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1245626