The Simplest Test of Target Zone Credibility
Under the assumption of no arbitrage, the credibility of an exchange rate target zone is tested by whether domestic interest rates fall within "rate-of-return bands" between the maximum and minimum home currency rate of return on a foreign investment in the absence of a devaluation. Under the assumption of uncovered interest parity, credibility is tested by whether expected future exchange rates fall within the exchange rate band. These tests are applied on data on the Swedish target zone from January 1987 through August 1990.
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Volume (Year): 38 (1991)
Issue (Month): 3 (September)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Krugman, Paul R, 1991.
"Target Zones and Exchange Rate Dynamics,"
The Quarterly Journal of Economics,
MIT Press, vol. 106(3), pages 669-82, August.
- Svensson, Lars E O, 1991.
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CEPR Discussion Papers
495, C.E.P.R. Discussion Papers.
- Svensson, Lars E. O., 1991. "The term structure of interest rate differentials in a target zone : Theory and Swedish data," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 87-116, August.
- Lars E.O. Svensson, 1990. "The Term Structure of Interest Rate Differentials in a Target Zone: Theory and Swedish Data," NBER Working Papers 3374, National Bureau of Economic Research, Inc.
- Svensson, L.E.O., 1990. "The Term Structure of Interest Rate Differentials in a Target Zone: Theory and Swedish Data," Papers 466, Stockholm - International Economic Studies.
- Svensson, L.E., 1990.
"The Foreign Exchange Risk Premium in a Target Zone with Devaluation Risk,"
475, Stockholm - International Economic Studies.
- 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.
- Svensson, Lars E O, 1991. "The Foreign Exchange Risk Premium in a Target Zone with Devaluation Risk," CEPR Discussion Papers 494, C.E.P.R. Discussion Papers.
- Lars E.O. Svensson, 1990. "The Foreign Exchange Risk Premium in a Target Zone with Devaluation Risk," NBER Working Papers 3466, National Bureau of Economic Research, Inc.
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