The French Franc and European Monetary Crisis
Marcel Didier
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Abstract
The currency crises of 1992 and 1993 have shown that extremely strong pressures can be exerted on official parities when investors realize that significant monetary realignments may be imminent. In this paper, I present an empirical analysis of the 1992-1993 crises in order to determine whether speculators are able to predict exactly when devaluations will occur, and whether information on current events political and economic influence their expectations and if so, in what way. In particular, I analyze the expectations of the date of the devaluation of the French franc against the Deutsche Mark before the 1992 and 1993 monetary crises. The empirical analysis shows that before the outbreak of these two crises, Investors realized that the devaluation was imminent and that they were very sensitive to the information disseminated daily on the markets. Over the last decade, the international financial markets have been affected mainly by the European currency crisis of 1992 and 1993 and, since 1997, by the Asian crisis. A currency crisis is a complex phenomenon that can be analyzed in different ways. In this respect, the dynamics of the crisis is a fundamental element, particularly with regard to the role played by exchange rate devaluation expectations that accelerate the onset of the crisis. In fact, the European crisis has demonstrated the very high pressure that can be exerted on official exchange rates when investors perceive an imminent risk of substantial realignments of exchange rates. As evidenced by research in the field of international finance (Flood and Garber, 1984), there is a close link between the collapse of a fixed-exchange rate and the expectations of financial market participants. Also, the analysis of the determinants of exchange rate expectations has become a fundamental step in economics. In addition, the recent European currency crisis has revived the debate on the dynamics of speculative attacks for which two categories of models have been proposed. The first model (Krugman, 1979) is based on the assumption that a fixed exchange rate system must be abandoned when foreign exchange reserves are exhausted. Indeed, insightful speculators then inevitably attack the currency before these reserves are completely exhausted, thus causing a change of system. The second category of models underlines the risk that a crisis is self-fulfilling, in the sense that speculators predict a change in monetary policy in the country whose currency is weakened if the currency crisis occurs. In both cases, the study of the speculative and rational behavior of the agents makes it possible to determine the date and the extent of the attacks. This means that there is a close link between the collapse of a fixed exchange rate system and the expectations of the players in the financial markets. It is therefore necessary, in order to understand the mechanisms that are at the origin of a crisis, to analyze what were the determining factors of the anticipations of realignment before the crisis occurs.
