Target zones and forward rates in a model with repeated realignments
AbstractThis paper studies the implications of the imperfect credibility of an exchange rate target zone on the term structure of forward premia. The relationship between spot and forward exchange rates of different maturities reflects the possibility of repeated realignments of the exchange rate band. The credibility of the commitment to the target zone implicit in forward market data can be extracted by estimating the model. Application to French/German data indicates that the model is capable of matching observed patterns of interest rate differentials during the EMS, while yielding estimates of the credibility parameters that accord with the experience of the FF/DM exchange rate during the 1980s.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Monetary Economics.
Volume (Year): 30 (1992)
Issue (Month): 3 (December)
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Web page: http://www.elsevier.com/locate/inca/505566
Other versions of this item:
- Gordon M. Bodnar & Leonardo Bartolini, 1992. "Target Zones and Forward Rates in a Model with Repeated Realignments," IMF Working Papers 92/22, International Monetary Fund.
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