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Targeting the Exchange Rate under Inflation

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  • Pessach, Shula
  • Razin, Assaf

Abstract

The purpose of this paper is to implement empirically a variant of the new theory of exchange-rate targeting, suitable for high-inflation, small, open economies. We formulate an expectations-induced relationship between the exchange rate and the fundamental, subject to random shocks and target-zone constraints on rates of depreciation. The empirical analysis provides estimates for the key parameters of the exchange-rate dynamic equation, and thereby identifies the unique roles played by policy variables and market fundamentals in foreign-exchange markets. Copyright 1994 by Blackwell Publishing Ltd.

Suggested Citation

  • Pessach, Shula & Razin, Assaf, 1994. "Targeting the Exchange Rate under Inflation," Review of International Economics, Wiley Blackwell, vol. 2(1), pages 40-49, February.
    • Handle: RePEc:bla:reviec:v:2:y:1994:i:1:p:40-49
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    References listed on IDEAS

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    1. Robert P. Flood & Peter M. Garber, 1991. "The Linkage Between Speculative Attack and Target Zone Models of Exchange Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1367-1372.
    2. Flood, Robert P. & Rose, Andrew K. & Mathieson, Donald J., 1991. "An empirical exploration of exchange-rate target-zones," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 35(1), pages 7-65, January.
    3. Giuseppe Bertola & Lars E. O. Svensson, 1993. "Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(3), pages 689-712.
    4. Svensson, Lars E. O., 1992. "The foreign exchange risk premium in a target zone with devaluation risk," Journal of International Economics, Elsevier, vol. 33(1-2), pages 21-40, August.
    5. Svensson, Lars E. O., 1991. "Target zones and interest rate variability," Journal of International Economics, Elsevier, vol. 31(1-2), pages 27-54, August.
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    Cited by:

    1. Emanuel Barnea & Moshe Kim, 2007. "Interest rate margins: a decomposition of dynamic oligopolistic conduct and market fundamentals," Applied Financial Economics, Taylor & Francis Journals, vol. 17(6), pages 487-499.

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