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Testing Target-Zone Models Using Efficient Method of Moments

  • Chung, Chae-Shick
  • Tauchen, George

The objectives of this article are threefold: (1) to test target zone models using more efficient and direct econometric methodology than previous research, (2) to identify an implicit band, if it exists, from observed data and to test target-zone models based on the estimated implicit band rather than the stated official band, and (3) to examine whether the exchange rate can be modeled as a managed float system with a central parity that lacks a band. We find strong evidence that a model with intramarginal intervention and a narrower implicit (unofficial) band can describe the dynamics of the French franc/Deutsche mark exchange rate from January I, 1987-July 30, 1993.

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Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 19 (2001)
Issue (Month): 3 (July)
Pages: 255-69

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Handle: RePEc:bes:jnlbes:v:19:y:2001:i:3:p:255-69
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