Exchange Rate Target Zone Models: A Bayesian Evaluation
AbstractThis paper develops a Bayesian approach to estimating exchange rate target zone models and rational expectations models in general. It also introduces a simultaneous-equation target zone model that incorporates stochastic realignment risk. Using FF/DM and IL/DM exchange rate data, we find that the signing of the 1987 Basle-Nyborg Agreement reduces both the magnitude and the likelihood of a central parity realignment, while the lagged exchange rate deviation from its central parity increases them. Furthermore, the interest rate policies and the monetary conditions of the participating countries signal a forthcoming realignment. In general, we are unable to improve upon a simple random walk model in out-of-sample exchange rate prediction by introducing target zone models.
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Bibliographic InfoArticle provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.
Volume (Year): 14 (1999)
Issue (Month): 5 (Sept.-Oct.)
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Web page: http://www.interscience.wiley.com/jpages/0883-7252/
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- Oleg Korenok & Stanislav Radchenko, 2005.
"The smooth transition autoregressive target zone model with the Gaussian stochastic volatility and TGARCH error terms with applications,"
0505, VCU School of Business, Department of Economics.
- Oleg Korenok & Stanislav Radchenko, 2005. "The smooth transition autoregressive target zone model with the Gaussian stochastic volatility and TGARCH error terms with applications," Econometrics 0508015, EconWPA.
- Chakravarty, Sugato & Li, Kai, 2003. "A Bayesian analysis of dual trader informativeness in futures markets," Journal of Empirical Finance, Elsevier, vol. 10(3), pages 355-371, May.
- Oleg Korenok & Stanislav Radchenko, 2005. "Expectations Anchoring in Inflation Targeting Regimes," Working Papers 0503, VCU School of Business, Department of Economics.
- Rangvid, Jesper & Sorensen, Carsten, 2001. "Determinants of the implied shadow exchange rates from a target zone," European Economic Review, Elsevier, vol. 45(9), pages 1665-1696, October.
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