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An Empirical Reassessment of Target-zone Nonlinearities

Author

Listed:
  • Garratt, Anthony
  • Psaradakis, Zacharias
  • Sola, Martin

Abstract

This paper investigates the presence of target-zone nonlinearities in the Pound Sterling/Deutsche Mark exchange rate for the period of the UK European Exchange Rate Mechanism (ERM) membership, using data with frequency of every two days. Tests against general nonlinear specifications as well as specifications consistent with a stochastic devaluation risk model of exchange rate target zones are carried out using recursive techniques. In addition, the significance of nonlinear effects is analysed within a recursive Bayesian frame-work. The authors find evidence of target-zone nonlinearities in the whole sample, but the recursive analysis yields support for the presence of such nonlinearities only in specific subsamples. The results imply that the reductions in the UK inflation was most likely a consequence of contractionary policies rather than of the expectational effects of the target zone.

Suggested Citation

  • Garratt, Anthony & Psaradakis, Zacharias & Sola, Martin, 1998. "An Empirical Reassessment of Target-zone Nonlinearities," Cambridge Working Papers in Economics 9825, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:9825
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    Cited by:

    1. Venus Khim-Sen Liew & Kian-Ping Lim & Evan Lau & Chee-Keong Choong, 2003. "Exchange Rate – Relative Price Relationship: Nonlinear Evidence from Malaysia," International Finance 0312001, University Library of Munich, Germany.
    2. Venus Khim-Sen Liew & Chee-Keong Choong & Evan Lau & Kian-Ping Lim, 2005. "Exchange Rate – Relative Price Nonlinear Cointegration Relationship in Malaysia," Economics Bulletin, AccessEcon, vol. 6(11), pages 1-16.
    3. repec:ebl:ecbull:v:6:y:2005:i:11:p:1-16 is not listed on IDEAS

    More about this item

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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