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

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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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  • Christopher J. Neely, 1994. "Realignments of target zone exchange systems: what do we know?," Working Papers 1994-020, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:1994-020
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    Cited by:

    1. Haas, Markus & Mittnik, Stefan & Mizrach, Bruce, 2006. "Assessing central bank credibility during the ERM crises: Comparing option and spot market-based forecasts," Journal of Financial Stability, Elsevier, vol. 2(1), pages 28-54, April.
    2. Pierre Siklos & Rod Tarajos, 1996. "Fundamentals and devaluation expectations in target zones: Some new evidence from the ERM," Open Economies Review, Springer, vol. 7(1), pages 35-59, January.
    3. Marko Malovic, 2007. "Exchange Rate Regimes and Monetary Policies in Emerging Markets: A Showdown for Few Theoretical Misconceptions," Economic Analysis, Institute of Economic Sciences, vol. 40(1-2), pages 17-28.
    4. 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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