Impact of EMS Membership on Its Nominal Exchange Rate Volatility

Abstract

This paper analyzes the exchange rate volatility after EMS was formed to stabilize bilateral nominal exchange rates among member countries. The analysis compares the exchange rate volatilities before and after the advent of the EMS, comparing members' currency volatilities with non-EMS currency volatilities. Multivariate GARCH models as well as univariate GARCH models indicate that since March, 1979 the existence of the EMS has coincided with a marked reduction in the volatilities of exchange rates within the EMS. However, in the EMS versus non-EMS cases, or between-non-EMS currency cases, some countries show at least constant volatilities, even after March, 1979. This somewhat weakens claims that the reduction in volatility of inter-EMS currency rates has been a result of the creation of the system alone.