Is exchange rate risk higher in the ERM after the widening of fluctuation bands?

Series: Working Papers. 9419.

Author: Juan Ayuso. Maria Perez Jurado and Fernando Restoy.

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Is exchange rate risk higher in the ERM after the widening of fluctuation bands? (1 MB)

Abstract

This paper proposes an indicator of exchange rate risk for currencies subject to exchange
rate regimes which are not perfectly credible. This indicator is applied to several EMS
currencies for periods before and after the widening of the fluctuation bands. We find that,
contrary to what standard (GARCH-type) estimates suggest, exchange rate risk within the
ERM is generally lower after the band widening than before. However, exchange rate risk
for currencies that left the ERM is currently higher than for ERM currencies and also
higher than in the period when they belonged to the mechanism.