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Exchange rate dynamics and currency unification: the Ostmark-DM rate

Author: Burda, Michael C. ; Gerlach, StefanINSEAD Area: Economics and Political Science Series: Working Paper ; 90/78/EPS Publisher: Fontainebleau : INSEAD, 1990.Language: EnglishDescription: 18 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: This paper studies the exchange rate between the East and West German mark in the period before German monetary union. Standard exchange rate theory is shown to contain strong predictions about the dynamics of the exchange rate under these circumstances, and state space methods are used to estimate key parameters of the model. A random walk model fits data from the first part of the study, when it was unclear that monetary union would occur. In the second half, when union was expected, the Ostmark rate behaves as a weighted average of fundamentals and the expected terminal exchange rate
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This paper studies the exchange rate between the East and West German mark in the period before German monetary union. Standard exchange rate theory is shown to contain strong predictions about the dynamics of the exchange rate under these circumstances, and state space methods are used to estimate key parameters of the model. A random walk model fits data from the first part of the study, when it was unclear that monetary union would occur. In the second half, when union was expected, the Ostmark rate behaves as a weighted average of fundamentals and the expected terminal exchange rate

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