EXCESS RETURNS IN THE EMS - DO WEAK CURRENCIES STILL EXIST AFTER THE WIDENING OF THE FLUCTUATION BANDS

The authors analyze the issue of how the different institutional arran gements within the ERM have affected the behaviour of excess returns o n DM-denominated assets and contribute to the debate on the future of the EMS. Their approach consists in estimating simple forecasting mode ls for interest differentials, and testing for the presence of signifi cant (negative) mean prediction errors. The comparison between predict ed and actual outcome indicates that the new system might be character ized by the virtual disappearance of ''weak'' currencies, as the widen ing of the bands has removed the expectations of realignments which re sulted in high interest differentials.