Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models
A time-varying stochastic devaluation risk is introduced in a model of exchange rate target zones. The model produces realistic patterns of covariation between exchange rates and interest rate differentials, which previous target zone models have been unable to do. A "drift adjustment" method to estimate devaluation expectations from data is suggested.
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Volume (Year): 60 (1993)
Issue (Month): 3 ()
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- Delgado, F. & Dumas, B., 1990. "Monetary Contracting Between Central Banks And The Design Of Sustainable Exchange-Rate Zones," The Warwick Economics Research Paper Series (TWERPS) 360, University of Warwick, Department of Economics.
- W. R. M. Perraudin, 1990. "Exchange Rate Bands with Point Process Fundamentals," IMF Working Papers 90/108, International Monetary Fund. Full references (including those not matched with items on IDEAS)
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