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A time series model for an exchange rate in a target zone with applications

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  • Lundbergh, Stefan
  • Terasvirta, Timo

Abstract

In this paper we introduce a flexible target zone model that is capable of characterizing the dynamic behaviour of an exchange rate implied by the original target zone model of Krugman (1991) and its modifications. Our framework also enables the modeller to estimate an implicit target zone if it exists. A modelling cycle consisting of specification, estimation, and evaluation stages is constructed. The model is fitted to series of daily observations of the Swedish and Norwegian currency indices and the estimated models are evaluated

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 131 (2006)
Issue (Month): 1-2 ()
Pages: 579-609

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Handle: RePEc:eee:econom:v:131:y:2006:i:1-2:p:579-609

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Web page: http://www.elsevier.com/locate/jeconom

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  1. Fiorentini, Gabriele & Calzolari, Giorgio & Panattoni, Lorenzo, 1996. "Analytic Derivatives and the Computation of GARCH Estimates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(4), pages 399-417, July-Aug..
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  3. Lundbergh, Stefan & Terasvirta, Timo, 2002. "Evaluating GARCH models," Journal of Econometrics, Elsevier, vol. 110(2), pages 417-435, October.
  4. Catherine S. Forbes & Paul Kofman, 2000. "Bayesian Target Zones," Econometric Society World Congress 2000 Contributed Papers 0575, Econometric Society.
  5. Lindberg, Hans & Soderlind, Paul, 1994. " Intervention Policy and Mean Reversion in Exchange Rate Target Zones: The Swedish Case," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(4), pages 499-513.
  6. Taylor, Mark P. & Iannizzotto, Matteo, 2001. "On the mean-reverting properties of target zone exchange rates: a cautionary note," Economics Letters, Elsevier, vol. 71(1), pages 117-129, April.
  7. Bekaert, G.R.J. & Gray, S.F., 1997. "Target zones and exchange rates: An empirical investigation," Discussion Paper 1997-22, Tilburg University, Center for Economic Research.
  8. Torres, Jose L., 2000. "Stochastic intramarginal interventions in target zones," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 249-262, December.
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  13. Paul Krugman & Marcus Miller, 1992. "Exchange Rate Targets and Currency Bands," NBER Books, National Bureau of Economic Research, Inc, number krug92-1, octubre-d.
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  15. Chung, Chae-Shick & Tauchen, George, 2001. "Testing Target-Zone Models Using Efficient Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(3), pages 255-69, July.
  16. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
  17. Brooks, Chris & Reveiz, Alejandro H., 2002. "A model for exchange rates with crawling bands--an application to the Colombian peso," Journal of Economics and Business, Elsevier, vol. 54(5), pages 483-503.
  18. Iannizzotto, Matteo & Taylor, Mark P, 1999. "The Target Zone Model, Non-linearity and Mean Reversion: Is the Honeymoon Really Over?," Economic Journal, Royal Economic Society, vol. 109(454), pages C96-110, March.
  19. Klaster, Michel A. & Knot, Klaas H. W., 2002. "Toward an econometric target zone model with endogenous devaluation risk for a small open economy," Economic Modelling, Elsevier, vol. 19(4), pages 509-529, August.
  20. Eitrheim, Øyvind & Teräsvirta, Timo, 1995. "Testing the Adequacy of Smooth Transition Autoregressive Models," Working Paper Series in Economics and Finance 56, Stockholm School of Economics.
  21. Kenneth F. Wallis, 1999. "Asymmetric density forecasts of inflation and the Bank of England's fan chart," National Institute Economic Review, National Institute of Economic and Social Research, vol. 167(1), pages 106-112, January.
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