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| Author: | Bekaert, G. Gray, S. |
| Title: | Target zones and exchange rates: an empirical investigation |
| Journal: | Journal of International Economics
1998 : JUN, VOL. 45:1, p. 1-36 |
| Index terms: | EXCHANGE RATES INTERNATIONAL ECONOMICS |
| Language: | eng |
| Abstract: | This paper develops an empirical model of exchange rates in a target zone. The distribution of exchange rate changes is conditioned on a latent jump variable where the probability and size of a jump vary over time as a function of financial and macroeconomic variables. When there is no jump, the target zone is credible and exchange rate changes are constrained to remain within the target zone band. The paper revisits the empirical evidence from the European Monetary System regarding the conditional distribution of exchange rate changes, the credibility of the system, and the size of the foreign exchange risk premia. |
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