IDEAS home Printed from
   My bibliography  Save this paper

Exchange Rate Premia and the Credibility of the Crawling Target Zone in Hungary


  • Darvas, Zsolt


After the introduction of a preannounced crawling peg exchange rate regime in Hungary in March 1995, forward and futures rates of more than six months maturity exceeded the upper edge of the projected target zone of the Forint. This paper examines whether this fact reflects an additional devaluation expectation or whether it might be attributed to other factors, e.g. risk aversion or market inefficiency. Though in recent years the average premium on Forint assets was close to zero, past performance of the interest rate differential, as an indication of exchange rate movements, was poor; there is no real cointegrating relationship to be found. By calculating implicit probabilities of additional devaluations for the present situation, the conditions of risk neutrality and rational expectations can be rejected because the implied probabilities seem to be 'too large'. The main conclusion of the paper is that uncovered interest parity does not hold for the present Hungarian foreign exchange market; forward rates falling outside the projected band do not necessarily reflect lack of credibility in exchange rate policy.

Suggested Citation

  • Darvas, Zsolt, 1996. "Exchange Rate Premia and the Credibility of the Crawling Target Zone in Hungary," CEPR Discussion Papers 1307, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1307

    Download full text from publisher

    File URL:
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. Thomas, J, 1992. "Cartel Stability in an Exhaustible Resource Model," Economica, London School of Economics and Political Science, vol. 59(235), pages 279-293, August.
    2. Karp, Larry & Newbery, David M., 1993. "Intertemporal consistency issues in depletable resources," Handbook of Natural Resource and Energy Economics,in: A. V. Kneeseā€  & J. L. Sweeney (ed.), Handbook of Natural Resource and Energy Economics, edition 1, volume 3, chapter 19, pages 881-931 Elsevier.
    3. Olli Tahvonen, 1991. "On the dynamics of renewable resource harvesting and pollution control," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 1(1), pages 97-117, March.
    4. Griffin, James M, 1985. "OPEC Behavior: A Test of Alternative Hypotheses," American Economic Review, American Economic Association, vol. 75(5), pages 954-963, December.
    5. Tsutsui, Shunichi & Mino, Kazuo, 1990. "Nonlinear strategies in dynamic duopolistic competition with sticky prices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 136-161, October.
    6. Polasky, Stephen, 1992. "Do oil producers act as 'Oil'igopolists?," Journal of Environmental Economics and Management, Elsevier, vol. 23(3), pages 216-247, November.
    7. Salant, Stephen W, 1976. "Exhaustible Resources and Industrial Structure: A Nash-Cournot Approach to the World Oil Market," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 1079-1093, October.
    8. Pindyck, Robert S, 1978. "Gains to Producers from the Cartelization of Exhaustible Resources," The Review of Economics and Statistics, MIT Press, vol. 60(2), pages 238-251, May.
    9. Groot, Fons & Withagen, Cees & de Zeeuw, Aart, 1992. "Note on the Open-Loop von Stackelberg Equilibrium in the Cartel versus Fringe Model," Economic Journal, Royal Economic Society, vol. 102(415), pages 1478-1484, November.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Credibility; Emerging Markets; Peso Problem; Risk Premia; Target Zone; Uncovered Interest Parity;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:1307. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.