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A Univariate Analysis of EMS Exchange Rates Using a Target Zone Model

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Author Info
de Jong, F
Abstract

The models in the literature on exchange-rate target zones imply a non-linear time series model for the exchange rate. We show how the parameters of such models can be estimated and develop Maximum Likelihood and Method of Simulated Moments estimators for the target zone model of Krugman (1991). The Maximum Likelihood estimator is based on a computationally attractive approximation to the exact predictive density of the continuous time model. Monte Carlo experiments are used to assess the properties of this estimator. In the empirical part we estimate the model with data on recent EMS exchange rates. We find that the Krugman (1991) target zone model is not able to explain the full observed kurtosis and conditional heteroscedasticity of the exchange-rate returns. Copyright 1994 by John Wiley & Sons, Ltd.

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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 9 (1994)
Issue (Month): 1 (Jan.-March)
Pages: 31-45
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Handle: RePEc:jae:japmet:v:9:y:1994:i:1:p:31-45

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  1. Jon Vilasuso & Steve Cunningham, 1996. "Tests for Nonlinearity in EMS Exchange Rates," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 1(3), pages 155-168. [Downloadable!] (restricted)
  2. J. Isaac Miller, 2006. "Testing for Purchasing Power Parity Under a Target Zone Exchange Rate Regime," Working Papers 0604, Department of Economics, University of Missouri, revised 19 Nov 2007. [Downloadable!]
  3. Consuelo Gámez Amián & José L. Torres, 2004. "A Non-parametric reassessment of target zone nonlinearities: The Spanish Peseta/Deutsche Mark exchange rate," Economic Working Papers at Centro de Estudios Andaluces E2004/73, Centro de Estudios Andaluces. [Downloadable!]
  4. Jesús Rodríguez López & Hugo Rodríguez Mendizábal, 2006. "The optimal degree of exchange rate flexibility: A target zone approach," Working Papers 06.22, Universidad Pablo de Olavide, Departamento de Economía. [Downloadable!]
  5. Geert Bekaert & Stephen F. Gray, 1999. "Target Zones and Exchange Rates: An Empirical Investigation," NBER Working Papers 5445, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. José L. Torres, 2004. "A Non-parametric analysis of ERM exchange rate fundamentals," Economic Working Papers at Centro de Estudios Andaluces E2004/25, Centro de Estudios Andaluces. [Downloadable!]
    Other versions:
  7. Arturo José Galindo, 1998. "Estimating Credibility In Colombia'S Exchange Rate Target Zone," BORRADORES DE ECONOMIA 002604, BANCO DE LA REPÚBLICA. [Downloadable!]
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