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Testing the bounds: Empirical behavior of target zone fundamentals

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  • Miller, J. Isaac

Abstract

Standard target zone exchange rate models are based on nonlinear functions of unobserved economic fundamentals, which are assumed to be bounded, similarly to the target zone exchange rates themselves. Using a novel estimation and testing strategy, I show how this key but often overlooked assumption may be tested. Empirical results cast doubt on its validity in practice, providing a reason for well-documented empirical difficulties of these models in the literature.

Suggested Citation

  • Miller, J. Isaac, 2011. "Testing the bounds: Empirical behavior of target zone fundamentals," Economic Modelling, Elsevier, vol. 28(4), pages 1782-1792, July.
    • Handle: RePEc:eee:ecmode:v:28:y:2011:i:4:p:1782-1792
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    More about this item

    Keywords

    Target zone exchange rates Economic fundamental Unscented Kalman filter Rescaled range statistic;

    JEL classification:

    • F3 - International Economics - - International Finance
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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