Debt amortization requirements have been suggested as a way to reduce household indebtedness. However, a closer look reveals that amortization requirements may create incentives for both borrowers and lenders to borrow and lend more rather than less. Suppose that a household plans to finance a...

The paper presents estimates of devaluation expectations for six EMS currencies relative to the Deutsche mark, for the period March 1979-May 1990. The estimation method is simple and operational, and consistently generates sensible results. The estimates are constructed by the adjusting interest...

The trade-off between interest rate variability and the width of an exchange rate target zone is examined, using the regulated Brownian motion model of target zones. The interest rate differential’s asymptotic (unconditional) variability is increasing in the exchange rate band for narrow...

The credibility of the exchange rate bands in the Nordic countries during 1987-91 is examined with two tests. The results suggest that the credibility of Finland’s exchange rate band within a twelve-month horizon could not be rejected except in the fall of 1991; however, the band lacked...

An independent central bank can manage its balance sheet and its capital so as to commit itself to a depreciation of its currency and an exchange rate peg. This way, the central bank can implement the optimal escape from a liquidity trap, which involves a commitment to higher future inflation....