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Market Expectations in the UK Before and After the ERM Crisis
Author(s) -
Söderlin Paul
Publication year - 2000
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/1468-0335.00192
Subject(s) - pound (networking) , economics , interest rate , german , monetary economics , monetary policy , inflation (cosmology) , exchange rate , financial economics , theoretical physics , history , physics , archaeology , world wide web , computer science
The British pound left the ERM on 16 September 1992 after a period of turbulence. UK monetary policy soon shifted to lower short interest rates, and an inflation target was announced. This paper uses daily option prices to estimate how the market's probability distribution of the future mark–pound exchange rate and UK and German interest rates changed over the summer and autumn of 1992. The results show, among other things, how various policy decisions affected the market's assessment of the probabilities of realignments and lending rate cuts.