Paul Söderlind: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden
Abstract: The British pound left the ERM on 16 September 1992 after a period of turbulence. UK monetary policy soon shifted to lower short interest rates and an inflation target was announced. This paper uses daily option prices to estimate how the market's probability distribution of the future marks/pound exchange rate and UK and German interest rates changed over the summer and autumn of 1992. The results show, among other things, how various policy decisions affected the market's assessment of the probabilities of realignments and lending rate cuts.
25 pages, First version: December 8, 1997. Revised: March 19, 1999. Earlier revisions: September 1, 1998, August 28, 1998, March 19, 1999.
Note: Old title: Extracting Expectations about UK Monetary Policy 1992 from Option Prices
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