EXPECTED AND PREDICTED REALIGNMENTS - THE FF DM EXCHANGE-RATE DURING THE EMS, 1979-93/

Expected rates of devaluation for the French franc/Deutsche mark excha nge rate during the EMS are estimated using the ''drift adjustment'' m ethod. Exchange rates within the band display strong mean reversion. T he adjustment term, the expected rate of depreciation within the band, is often of the same magnitude as interest rate differentials. Bilate ral exchange rate limits towards other ERM currencies have a significa nt and sizeable effect on estimated expected rates of devaluation. The behavior of estimated expected rates of depreciation within the band accords fairly well with the theoretical model of Bertola and Svensson (1993). Estimated expected rates of devaluation to some extent predic t actual realignments.