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Nonparametric Empirical Evidence for Krugman's Target Zone Model

Author

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  • Sandro Claudio LERA

    (ETH Zurich)

  • Didier SORNETTE

    (ETH Zurich and Swiss Finance Institute)

Abstract

Krugman(1991)’s target zone model has become the reference of a large part of this literature. Despite its simplicity and elegance, empirical evidence has been lacking. Deriving from Krugman’s model analytical expressions for the conditional volatility and density distribution close to the target zone limit, we present clear and direct evidence that the bounded EUR/CHF exchange rate between September 2011 and January 2015 was quantitatively well described by Krugman’s model. Krugman’s target zone model holds after all, but apparently only under extreme and sustained pressure that pushes continuously the exchange rate very close to the boundary of the target zone.

Suggested Citation

  • Sandro Claudio LERA & Didier SORNETTE, 2015. "Nonparametric Empirical Evidence for Krugman's Target Zone Model," Swiss Finance Institute Research Paper Series 15-22, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1522
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    File URL: http://ssrn.com/abstract=2634425
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    More about this item

    Keywords

    Exchange rate dynamics; target zone; conditional volatility;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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