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Exchange Rate Target Zone Models: A Bayesian Evaluation

  • Li, Kai
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This paper develops a Bayesian approach to estimating exchange rate target zone models and rational expectations models in general. It also introduces a simultaneous-equation target zone model that incorporates stochastic realignment risk. Using FF/DM and IL/DM exchange rate data, we find that the signing of the 1987 Basle-Nyborg Agreement reduces both the magnitude and the likelihood of a central parity realignment, while the lagged exchange rate deviation from its central parity increases them. Furthermore, the interest rate policies and the monetary conditions of the participating countries signal a forthcoming realignment. In general, we are unable to improve upon a simple random walk model in out-of-sample exchange rate prediction by introducing target zone models.

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File URL: http://qed.econ.queensu.ca:80/jae/1999-v14.5/
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 14 (1999)
Issue (Month): 5 (Sept.-Oct.)
Pages: 461-90

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Handle: RePEc:jae:japmet:v:14:y:1999:i:5:p:461-90
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