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Inside and Outside the Band Exchange Rate Fluctuations for Brazil

  • Ribeiro de Castro, Claudia

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

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    This paper analyzes the empirical fit of a new approach to exchange rate target zones. Unlike most of the literature on target zones, we use an estimation procedure that takes explicitly into account the band constraints, and hence their effect on the expectations of agents. Crucially, we do not impose Uncovered Interest Parity to assess realignment expectations. Rather than a point estimate of the future exchange rate, we estimate the entire range of realizations anticipated by the markets, and the probability attributed to each range. We examine high-frequency Brazilian post-stabilization (stable) data in allowing for both realignment jumps and within-the-band jumps. Knowledge of the exchange rate distribution can be relevant not only to the private sector for the management of currency risk, but also to policymakers as a source of prompt market feedback to policy changes or other political and economic shocks.

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    File URL: http://sites.uclouvain.be/econ/DP/IRES/2000-004.pdf
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    Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2000004.

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    Length: 32
    Date of creation: 01 Mar 1999
    Date of revision:
    Handle: RePEc:ctl:louvir:2000004
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    Web page: http://www.uclouvain.be/ires
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    1. 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.
    2. Lim, G. C. & Lye, J. N. & Martin, G. M. & Martin*, V. L., 1998. "The distribution of exchange rate returns and the pricing of currency options," Journal of International Economics, Elsevier, vol. 45(2), pages 351-368, August.
    3. Girardin, Eric & Marimoutou, Velayoudom, 1997. "Estimating the credibility of an exchange rate target zone," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 931-944, December.
    4. Garber, P.M. & Svensson, L.E.O., 1994. "The Operation and Collapse of Fixed Exchange Rate Regimes," Papers 588, Stockholm - International Economic Studies.
    5. Lindberg, Hans & Soderlind, Paul, 1994. " Intervention Policy and Mean Reversion in Exchange Rate Target Zones: The Swedish Case," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(4), pages 499-513.
    6. Bertola, Giuseppe & Svensson, Lars E O, 1991. "Stochastic Devaluation Risk and the Empirical Fit of Target Zone Models," CEPR Discussion Papers 513, C.E.P.R. Discussion Papers.
    7. Zhaohui Chen & Alberto Giovannini, 1992. "Estimating Expected Exchange Rates Under Target Zones," NBER Working Papers 3955, National Bureau of Economic Research, Inc.
    8. Bekaert, Geert & Gray, Stephen F., 1998. "Target zones and exchange rates:: An empirical investigation," Journal of International Economics, Elsevier, vol. 45(1), pages 1-35, June.
    9. Paul Krugman & Marcus Miller, 1992. "Exchange Rate Targets and Currency Bands," NBER Books, National Bureau of Economic Research, Inc, number krug92-1, October.
    10. Chen, Zhaohui & Giovannini, Alberto, 1992. "Target zones and the distribution of exchange rates: An estimation method," Economics Letters, Elsevier, vol. 40(1), pages 83-89, September.
    11. Bertola, Giuseppe & Caballero, Ricardo, 1990. "Target Zones and Realignments," CEPR Discussion Papers 398, C.E.P.R. Discussion Papers.
    12. Dominquez, Kathryn M. & Kenen, Peter B., 1992. "Intramarginal intervention in the EMS and the target-zone model of exchange-rate behavior," European Economic Review, Elsevier, vol. 36(8), pages 1523-1532, December.
    13. Lindberg, H. & Svensson, L.E. & Soderlind, P., 1991. "Devaluation Expectations: the Swedish Krona 1982-1991," Papers 495, Stockholm - International Economic Studies.
    14. Alun H. Thomas, 1994. "Expected Devaluation and Economic Fundamentals," IMF Staff Papers, Palgrave Macmillan, vol. 41(2), pages 262-285, June.
    15. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August.
    16. Froot, Kenneth A & Thaler, Richard H, 1990. "Foreign Exchange," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 179-92, Summer.
    17. Robert P. Flood & Andrew K. Rose & Donald J. Mathieson, 1990. "An Empirical Exploration of Exchange Rate Target-Zones," NBER Working Papers 3543, National Bureau of Economic Research, Inc.
    18. Krugman, Paul & Miller, Marcus, 1993. "Why have a target zone?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 38(1), pages 279-314, June.
    19. Alejandro M. Werner, 1995. "Target Zones and Realignment Expectations; The Israeli and Mexican Experience," IMF Working Papers 95/114, International Monetary Fund.
    20. Jose M. Campa & P.H. Kevin Chang & Robert L. Reider, 1997. "Implied Exchange Rate Distributions: Evidence from OTC Option Markets," NBER Working Papers 6179, National Bureau of Economic Research, Inc.
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