DEVALUATIONS AND DEPRECIATION EXPECTATIONS IN THE EMS

This paper proposes a method to estimate separately the size of the ex pected depreciation in an eventual devaluation of the central parity i n the ERM, and the probability assigned by agents to this devaluation occurring in the short run. The proposed method complements the inform ation provided by the jumps observed in market exchange rates around r ealignments with the information contained in interest rate differenti als on the future behaviour of exchange rates. The separation of proba bility and size allows a richer analysis of the effects of devaluation s on exchange rate credibility in the ERM.