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Realignments of target zone exchange systems: what do we know?

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  • Christopher J. Neely

Abstract

This article surveys recent work on forecasting realignments and estimating the credibility of target zones. The literature finds that realignments are somewhat predictable from readily available information such as interest rates and position of the exchange rate within the band. The relationship between realignment expectations and macrovariables is weak and uncertain. Realignments are said to "surprise" policy makers and market participants; they can only be predicted a short time before they happen. Further work on the formation of expectations would be an important contribution to future research in this area. Additionally, the role of the U.S. dollar in ERM realignments is often noted but has not yet been incorporated into the estimation techniques.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1994-020.

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Date of creation: 1994
Date of revision:
Publication status: Published in Federal Reserve Bank of St. Louis Review, September/October 1994, 76(5)
Handle: RePEc:fip:fedlwp:1994-020

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Keywords: Foreign exchange rates;

References

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  1. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-48, August.
  2. Patricia S. Pollard, 1993. "Central bank independence and economic performance," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 21-36.
  3. Maurice Obstfeld, 1984. "Balance-of-Payments Crises and Devaluation," NBER Working Papers 1103, National Bureau of Economic Research, Inc.
  4. Edison, H.J., 1993. "The Effectiveness of Central-Bank Intervention: A Survey of the Litterature after 1982," Princeton Studies in International Economics 18, International Economics Section, Departement of Economics Princeton University,.
  5. Bryon Higgins, 1993. "Was the ERM crisis inevitable?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 27-40.
  6. Andrew K. Rose & Lars E.O. Svensson, 1991. "Expected and predicted realignments: the FF/DM exchange rate during the EMS," International Finance Discussion Papers 395, Board of Governors of the Federal Reserve System (U.S.).
  7. Krugman, P., 1993. "What Do We Need to Know About the International Monetary System?," Princeton Studies in International Economics 190, International Economics Section, Departement of Economics Princeton University,.
  8. Lars E. O. Svensson, 1991. "The Simplest Test of Target Zone Credibility," IMF Staff Papers, Palgrave Macmillan, vol. 38(3), pages 655-665, September.
  9. repec:imf:imfocp:48 is not listed on IDEAS
  10. Krugman, Paul & Miller, Marcus, 1992. "Why Have a Target Zone?," CEPR Discussion Papers 718, C.E.P.R. Discussion Papers.
  11. Cletus C. Coughlin & Kees Koedijk, 1990. "What do we know about the long-run real exchange rate?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 36-48.
  12. Mizrach, Bruce, 1995. "Target zone models with stochastic realignments: an econometric evaluation," Journal of International Money and Finance, Elsevier, vol. 14(5), pages 641-657, October.
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  14. Bean, Charles R, 1992. "Economic and Monetary Union in Europe," CEPR Discussion Papers 722, C.E.P.R. Discussion Papers.
  15. Frankel, Jeffrey & Phillips, Steven, 1992. "The European Monetary System: Credible at Last?," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 791-816, October.
  16. Hali J. Edison & Linda S. Kole, 1994. "European monetary arrangements: implications for the dollar, exchange rate variability and credibility," International Finance Discussion Papers 468, Board of Governors of the Federal Reserve System (U.S.).
  17. Koedijk, Kees G & Kool, Clemens J M, 1994. "Tail Estimates and the EMS Target Zone," Review of International Economics, Wiley Blackwell, vol. 2(2), pages 153-65, June.
  18. Andrew K. Rose & Lars E.O. Svensson, 1993. "European Exchange Rate Credibility Before the Fall," NBER Working Papers 4495, National Bureau of Economic Research, Inc.
  19. Fratianni, Michele & von Hagen, Juergen, 1990. "The European Monetary System ten years after," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 32(1), pages 173-241, January.
  20. Charles Engel & Craig S. Hakkio, 1993. "Exchange rate regimes and volatility," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 43-58.
  21. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  22. Bruce Mizrach, 1993. "Mean reversion in EMS exchange rates," Research Paper 9301, Federal Reserve Bank of New York.
  23. Michael J. Dueker, 1993. "Hypothesis testing with near-unit roots: the case of long-run purchasing-power parity," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 37-48.
  24. Zhaohui Chen & Alberto Giovannini, 1992. "Estimating Expected Exchange Rates Under Target Zones," NBER Working Papers 3955, National Bureau of Economic Research, Inc.
  25. Michele Fratianni, 1988. "The European Monetary System: How Well Has It Worked?," Cato Journal, Cato Journal, Cato Institute, vol. 8(2), pages 477-506, Fall.
  26. Froot, Kenneth A & Thaler, Richard H, 1990. "Foreign Exchange," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 179-92, Summer.
  27. Edison, Hali J. & Fisher, Eric O'N, 1991. "A long-run view of the European monetary system," Journal of International Money and Finance, Elsevier, vol. 10(1), pages 53-70, March.
  28. Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers 81, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Haas, Markus & Mittnik, Stefan & Mizrach, Bruce, 2005. "Assessing central bank credibility during the EMS crises: Comparing option and spot market-based forecasts," CFS Working Paper Series 2005/09, Center for Financial Studies (CFS).
  2. Neely, Christopher J., 1999. "Target zones and conditional volatility: The role of realignments," Journal of Empirical Finance, Elsevier, vol. 6(2), pages 177-192, April.

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