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Inside and Outside the Band Exchange Rate Fluctuations for Brazil

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  • Ribeiro de Castro, Claudia

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

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    Abstract

    This paper analyzes the empirical fit of a new approach to exchange rate target zones. Unlike most of the literature on target zones, we use an estimation procedure that takes explicitly into account the band constraints, and hence their effect on the expectations of agents. Crucially, we do not impose Uncovered Interest Parity to assess realignment expectations. Rather than a point estimate of the future exchange rate, we estimate the entire range of realizations anticipated by the markets, and the probability attributed to each range. We examine high-frequency Brazilian post-stabilization (stable) data in allowing for both realignment jumps and within-the-band jumps. Knowledge of the exchange rate distribution can be relevant not only to the private sector for the management of currency risk, but also to policymakers as a source of prompt market feedback to policy changes or other political and economic shocks.

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    File URL: http://sites.uclouvain.be/econ/DP/IRES/2000-004.pdf
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    Bibliographic Info

    Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2000004.

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    Length: 32
    Date of creation: 01 Mar 1999
    Date of revision:
    Handle: RePEc:ctl:louvir:2000004

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    Web page: http://www.uclouvain.be/ires
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    Keywords: Exchange rates; Target zones; Brazil;

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    1. Bertola, Giuseppe & Caballero, Ricardo J, 1992. "Target Zones and Realignments," American Economic Review, American Economic Association, vol. 82(3), pages 520-36, June.
    2. Paul Krugman & Marcus Miller, 1992. "Exchange Rate Targets and Currency Bands," NBER Books, National Bureau of Economic Research, Inc, number krug92-1.
    3. Hans Lindberg & Lars E.O. Svensson & Paul Soderlind, 1991. "Devaluation Expectations: The Swedish Krona 1982-1991," NBER Working Papers 3918, National Bureau of Economic Research, Inc.
    4. Svensson, Lars E O, 1991. "The Term Structure of Interest Rate Differentials in a Target Zone: Theory and Swedish Data," CEPR Discussion Papers 495, C.E.P.R. Discussion Papers.
    5. Robert P. Flood & Andrew K. Rose & Donald J. Mathieson, 1990. "An Empirical Exploration of Exchange Rate Target-Zones," NBER Working Papers 3543, National Bureau of Economic Research, Inc.
    6. Alejandro M. Werner, 1995. "Target Zones and Realignment Expectations: The Israeli and Mexican Experience," IMF Working Papers 95/114, International Monetary Fund.
    7. Krugman, Paul & Miller, Marcus, 1993. "Why have a target zone?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 38(1), pages 279-314, June.
    8. Girardin, Eric & Marimoutou, Velayoudom, 1997. "Estimating the credibility of an exchange rate target zone," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 931-944, December.
    9. Giuseppe Bertola & Lars E.O. Svensson, 1991. "Stochastic Devaluation Risk and the Empirical Fit of Target Zone Models," NBER Working Papers 3576, National Bureau of Economic Research, Inc.
    10. Jose M. Campa & P.H. Kevin Chang & Robert L. Reider, 1997. "Implied Exchange Rate Distributions: Evidence from OTC Option Markets," NBER Working Papers 6179, National Bureau of Economic Research, Inc.
    11. Lim, G. C. & Lye, J. N. & Martin, G. M. & Martin*, V. L., 1998. "The distribution of exchange rate returns and the pricing of currency options," Journal of International Economics, Elsevier, vol. 45(2), pages 351-368, August.
    12. Geert Bekaert & Stephen F. Gray, 1999. "Target Zones and Exchange Rates: An Empirical Investigation," NBER Working Papers 5445, National Bureau of Economic Research, Inc.
    13. Peter M. Garber & Lars E.O. Svensson, 1994. "The Operation and Collapse of Fixed Exchange Rate Regimes," NBER Working Papers 4971, National Bureau of Economic Research, Inc.
    14. Zhaohui Chen & Alberto Giovannini, 1992. "Estimating Expected Exchange Rates Under Target Zones," NBER Working Papers 3955, National Bureau of Economic Research, Inc.
    15. Alun H. Thomas, 1994. "Expected Devaluation and Economic Fundamentals," IMF Staff Papers, Palgrave Macmillan, vol. 41(2), pages 262-285, June.
    16. Dominquez, Kathryn M. & Kenen, Peter B., 1992. "Intramarginal intervention in the EMS and the target-zone model of exchange-rate behavior," European Economic Review, Elsevier, vol. 36(8), pages 1523-1532, December.
    17. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August.
    18. Froot, Kenneth A & Thaler, Richard H, 1990. "Foreign Exchange," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 179-92, Summer.
    19. 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.
    20. Chen, Zhaohui & Giovannini, Alberto, 1992. "Target zones and the distribution of exchange rates: An estimation method," Economics Letters, Elsevier, vol. 40(1), pages 83-89, September.
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