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Variable Probability of Realignment in a Target Zone

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Author Info

  • Tristani, Oreste

Abstract

The target zone model presented here encompasses a realignment probability that increases as the fundamental deviates from the center of the zone. The analysis is carried out for cases where the fundamental follows either a Brownian motion or an Ornstein-Uhlenbeck process. The simplest version of the model yields tractable results, which prove to be robust when its most restrictive assumption is relaxed. The solution obtained is dubbed the steeper S, in accordance with its most relevant feature. Copyright 1994 by The editors of the Scandinavian Journal of Economics.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 96 (1994)
Issue (Month): 1 ()
Pages: 1-14

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Handle: RePEc:bla:scandj:v:96:y:1994:i:1:p:1-14

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Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442

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Cited by:
  1. Marie Bessec, 2000. "Mean-Reversion versus PPP Adjustment: The Two Regimes of Exchange Rate Dynamics Under the EMS, 1979-1998," Econometric Society World Congress 2000 Contributed Papers 1305, Econometric Society.
  2. Campos, M. Isabel & Herrera, Julio & Jimenez-Ridruejo, Zenon, 1999. "Censured Exchange Rates in a Discrete Time Target Zones Model: The Spanish Peseta/Deutsche Mark Case," ERSA conference papers ersa99pa183, European Regional Science Association.
  3. Orlowski, Lucjan T. & Rybinski, Krzysztof, 2006. "Implications of ERM2 for Poland's monetary policy," Economic Systems, Elsevier, vol. 30(4), pages 346-365, December.
  4. Jesús Crespo-Cuaresma & Balázs Égert & Ronald MacDonald, 2005. "Non-Linear Exchange Rate Dynamics in Target Zones: A Bumpy Road Towards A Honeymoon Some Evidence from the ERM, ERM2 and Selected New EU Member States," William Davidson Institute Working Papers Series wp771, William Davidson Institute at the University of Michigan.
  5. Bessec, Marie, 2003. "Mean-reversion vs. adjustment to PPP: the two regimes of exchange rate dynamics under the EMS, 1979-1998," Economic Modelling, Elsevier, vol. 20(1), pages 141-164, January.
  6. Mark P. Taylor & Stefan Reitz, 2013. "Exchange Rates in Target Zones - Evidence from the Danish Krone," Kiel Working Papers 1827, Kiel Institute for the World Economy.
  7. Driffill, John & Sola, Martin, 2006. "Target zones for exchange rates and policy changes," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 912-931, October.
  8. Lai, Ching-chong & Fang, Chung-rou, 2012. "Is the honeymoon effect valid in the presence of both exchange rate and output expectations? A graphical analysis," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 140-146.
  9. M. Isabel Campos & Zenon Jimenez-Ridruejo, 2003. "Were the peseta exchange rate crises forecastable during target zone period?," Applied Economics, Taylor & Francis Journals, vol. 35(9), pages 1087-1099.
  10. Bauer, Christian & De Grauwe, Paul & Reitz, Stefan, 2007. "Exchange rate dynamics in a target zone: a heterogeneous expectations approach," Discussion Paper Series 1: Economic Studies 2007,11, Deutsche Bundesbank, Research Centre.
  11. Cornell, Christopher M., 2003. "Target zones, reserve crises, and inverted S-curves," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(4), pages 313-323, October.
  12. Lai, Ching-chong & Fang, Chung-rou & Chang, Juin-jen, 2008. "Volatility trade-offs in exchange rate target zones," International Review of Economics & Finance, Elsevier, vol. 17(3), pages 366-379.
  13. M. Isabel Campos & Zenón Jiménez-Ridruejo, . "Were the Peseta Exchange Rate Crises Forecastable During Target Zone Period?," Working Papers on International Economics and Finance 00-07, FEDEA.
  14. repec:onb:oenbwp:y:2004:i:1:b:1 is not listed on IDEAS
  15. Kempa, Bernd & Nelles, Michael, 1999. "Nonfundamental FX trading and excess volatility in credible target zones Theory and empirical evidence," International Review of Economics & Finance, Elsevier, vol. 8(1), pages 55-70, January.
  16. Kempa, Bernd & Nelles, Michael, 1998. "On the Viability of Exchange Rate Target Zones in a Mundell-Fleming Model with Stochastic Output Shocks," Journal of Policy Modeling, Elsevier, vol. 20(5), pages 603-619, October.

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