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WP 2008/1. Anna Naszódi: Are the exchange rates of EMU candidate countries anchored by their expected euro locking rates?


This paper tests whether the exchange rates of the Czech koruna, the Hungarian forint, and the Polish zloty were anchored by market expectations concerning their euro locking rates. First, the process of the exchange rate is derived as a function of the following factors: (i) latent exchange rate, (ii) market expectations concerning locking rate, (iii) market expectations concerning locking date. Then, the locking dates and rates are filtered from historical exchange rates, currency option prices and yield curves. The main finding of the paper is that the relatively stable market expectations concerning the locking rates have substantially stabilized the three analyzed exchange rates.

JEL: F31, F36, G13.

Keywords: Monetary union, eurozone entry, factor model, Kalman filter, exchange rate stabilization, asset-pricing exchange rate model.