25
Three-month forward exchange rates vis-à-vis the DM
The following are our own cross-rate calculations of forward exchange rates of EU currencies vis-à-vis the DM based upon end-of-period three-
month forward exchange rates vis-à-vis the US dollar (monthly series). The forward exchange rates are expressed as premiums (+) and
discounts (-) on the forward value of the currency relative to its spot price. Defining the spot rate as currency units per US dollar, the
formula for the forward premium on the currency in percent per annum is:
( S, - F,'3 ) X 4 X 100
S,
The annualized forward premium or discount is based on a 360-day year, and the three-month forward rate is the rate for 90 days, yielding
the factor 4 that is employed in the formula. Since direct DM forward (and spot) exchange rates are not available for all EU countries
considered and/or over a sufficiently long period, we used cross-rate calculations of forward and spot exchange rates of EU currencies vis-à
vis the DM based upon forward exchange rates vis-à-vis the US dollar. Concerning these cross-rate calculations, we already presume in the
investigation design perfect capital mobility. However, this is only possible on the basis of the assumption of perfect arbitrage between
markets of foreign exchange. Due to transactions costs in triangular arbitrage, cross-rate calculations do not exactly correspond to direct
quotations. In constructing DM forward and spot exchange rates, dollar cross-rate calculations are preferred because of the reserve currency
status of the dollar, the role of the dollar as the world’s major intervention currency and the scale and efficiency of the US financial
markets. Forward exchange rates for Italy are only available from January 1977 onwards.
Source: IMF (1985), International Financial Statistics Supplement on Exchange Rates and IMF, International Financial Statistics, line 60f.
Spot exchange rates vis-à-vis the DM
Own cross-rate calculations of spot exchange rates of EU countries vis-à-vis the DM based upon end-of-period spot exchange rates vis-à-
vis the US dollar (monthly series).
Source: IMF, International Financial Statistics, line ae.
The independent variables
|
Indicator |
Description |
Source |
|
"CA |
Current account balance as percentage of GDP |
OECD, National Accounts, Main Aggregates, Volume I, |
|
CREDIT |
Total domestic credit to the economy as percentage of GDP |
IMF, IFS Yearbook 1994, line 32 |
|
DEBT |
General government gross debt as percentage of GDP |
OECD Economic Outlook |
|
DEP |
Proxy for three-month exchange rate expectation, Realized |
IMF, International Financial Statistics, line ae |
|
EXR |
Variable indicating exchange rate flexibility, 2 minimal flexi- |
IMF, Exchange Restrictions, Annual Report, 1973-1978. |
|
"es |
Eijffinger-Schaling index of central bank independence (ranges |
Eijffinger and Schaling (1993), Eijffinger and Van Keu- |
|
DEF |
General government financial balance (government net lend- |
OECD Economic Outlook |
|
GDP |
Gross domestic product |
OECD, National Accounts, Main Aggregates, Volume I, |
|
^M0 |
Base money (reserve money) |
IMF, IFS Yearbook 1994, line 14 |
|
^M1 |
Money as percentage of GDP |
IMF, IFS Yearbook 1994, line 34 |
|
"m2 |
Money plus quasi-money as percentage of GDP |
IMF, IFS Yearbook 1994, lines 34 (Money) and 35 |
|
M2M1 |
Money plus quasi-money over money |
IMF, IFS Yearbook 1994, lines 34 and 35 |
|
^INF |
Rate of change in the consumer price index (1990=100) |
IMF, International Financial Statistics, line 64 |
|
INF TAX |
Inflation rate times M0 as percentage of GDP |
IMF, International Financial Statistics, line 64 (CPI), |
|
LEFT |
Dummy variable, taking the value 1 when a left-wing gov- |
Banks (1993), Political Handbook of the World: 1993, |
|
OPEN |
Openness = (Export of goods and services+Imports of goods |
OECD, National Accounts, Main Aggregates, Volume I, |
|
PROD |
Productivity in the business sector, index (1987=100) |
OECD Economic Outlook |
|
SIGGOV |
The total number of significant government changes, measure |
De Haan and Van ’tHag (1994) |
|
SEIGN |
Growth rate of nominal GDP times base money (M0) as |
IMF, International Financial Statistics, line 64 (CPI), line |
|
"UN |
Unemployment rate |
OECD Economic Outlook |