The French franc was the main target of speculators during the August 1993 assault on the EMS despite the fact that France was running a 2% inflation rate while Germany had a 4.3% inflation rate. Why might this be?
Two words explain this situation: "credibility" and "expectations." Given the market's trust in the Bundesbank, the high German inflation rate was viewed as an aberration that the Bundesbank would soon get under control. Conversely, currency traders were less certain of the Bank of France's long-term commitment to low ...
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