Stability of the Exchange–Rate Agreements and Public Debt Management: the Italian Experience within the EMS
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This paper analyses the issue of the interdependence between fundamentals and expectations in the emergence of a currency crisis from both a theoretical and an empirical point of view with specific reference to the Italian case.
Theoretically, currency crises depend as much on fundamentals as on expectations, and the latter again on the critical condition of the former for the associated profit opportunity. Hence, in order to reduce the risk of a new speculative attack, an appropriate public debt management, which for its high level is the main fundamental in Italy, and fiscal policy must be adopted. These may be implemented with the evaluation of the probability associated to devaluation, which enables the policy-maker to identify the critical condition for die occurrence of the crisis. The empirical analysis also provides evidence in favour of the theory that points public budget government policy as one of the major factors in leading to a non-viable fixed exchange rate regime.
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