IDEAS home Printed from https://ideas.repec.org/p/fip/fedgif/388.html
   My bibliography  Save this paper

Is the EMS the perfect fix? An empirical exploration of exchange rate target zones

Author

Listed:
  • Robert P. Flood
  • Andrew K. Rose
  • Donald J. Mathieson

Abstract

In the context of a flexible-price monetary exchange rate model and the assumption of uncovered interest parity, we obtain a measure of the fundamental determinant of exchange rates. Daily data for the European Monetary System is then used to explore the importance of non-linearities in the relationship between the exchange rates and fundamentals. While some statistical evidence of non-linearities in conditional means of exchange rates is detected, these seem to have little economic content. A number of implications of existing "target zone" exchange rate models are tested; little support is found for existing models of limited exchange rate flexibility.

Suggested Citation

  • Robert P. Flood & Andrew K. Rose & Donald J. Mathieson, 1990. "Is the EMS the perfect fix? An empirical exploration of exchange rate target zones," International Finance Discussion Papers 388, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:388
    as

    Download full text from publisher

    File URL: http://www.federalreserve.gov/pubs/ifdp/1990/388/default.htm
    Download Restriction: no

    File URL: http://www.federalreserve.gov/pubs/ifdp/1990/388/ifdp388.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Meese, Richard A & Rose, Andrew K, 1990. "Nonlinear, Nonparametric, Nonessential Exchange Rate Estimation," American Economic Review, American Economic Association, vol. 80(2), pages 192-196, May.
    2. 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.
    3. Perron, Pierre, 1988. "Trends and random walks in macroeconomic time series : Further evidence from a new approach," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 297-332.
    4. Spiller, Pablo T & Wood, Robert O, 1988. "Arbitrage during the Dollar-Sterling Gold Standard, 1899-1908: An Economic Approach," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 882-892, August.
    5. Goldfeld, Stephen M. & Sichel, Daniel E., 1990. "The demand for money," Handbook of Monetary Economics,in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 8, pages 299-356 Elsevier.
    6. Smith, Gregor W & Smith, R Todd, 1990. "Stochastic Process Switching and the Return to Gold, 1925," Economic Journal, Royal Economic Society, vol. 100(399), pages 164-175, March.
    7. Richard A. Meese & Andrew K. Rose, 1991. "An Empirical Assessment of Non-Linearities in Models of Exchange Rate Determination," Review of Economic Studies, Oxford University Press, vol. 58(3), pages 603-619.
    8. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    9. Flood, Robert P & Garber, Peter M, 1983. "A Model of Stochastic Process Switching," Econometrica, Econometric Society, vol. 51(3), pages 537-551, May.
    10. Diebold, Francis X. & Nason, James A., 1990. "Nonparametric exchange rate prediction?," Journal of International Economics, Elsevier, vol. 28(3-4), pages 315-332, May.
    11. Flood, Robert P & Hodrick, Robert J, 1990. "On Testing for Speculative Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 85-101, Spring.
    12. Shula Pessach & Assaf Razin, 1991. "Targeting the Exchange Rate: An Empirical Investigation," NBER Working Papers 3662, National Bureau of Economic Research, Inc.
    13. Officer, Lawrence H, 1986. "The Efficiency of the Dollar-Sterling Gold Standard, 1890-1908," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1038-1073, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Reitz Stefan & Taylor Mark P., 2013. "The Danish krone-euro exchange rate and Danmark Nationalbank intervention operations," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(3), pages 239-249, May.
    2. Giuseppe Bertola & Lars E. O. Svensson, 1993. "Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 689-712.
    3. Frankel, Jeff & Phillips, Steve & Chinn, Menzie, 1992. "Financial and Currency Integration in the European Monetary System: The Statistical Record," Center for International and Development Economics Research (CIDER) Working Papers 233177, University of California-Berkeley, Department of Economics.
    4. Reitz, Stefan & Taylor, Mark P., 2013. "Exchange rates in target zones: Evidence from the Danish Krone," Kiel Working Papers 1827, Kiel Institute for the World Economy (IfW).
    5. Jesus Crespo Cuaresma & Balázs Égert & Ronald MacDonald, 2004. "Nonlinear Exchange Rate Dynamics in Target Zones," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 46-69.
    6. Susan M. Collins, 1992. "The Expected Timing of EMS Realignments: 1979-83," NBER Working Papers 4068, National Bureau of Economic Research, Inc.

    Corrections

    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:fip:fedgif:388. 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: (Ryan Wolfslayer) or (Keisha Fournillier). General contact details of provider: http://edirc.repec.org/data/frbgvus.html .

    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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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.