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Identifying Austria's implicit monetary target: an alternative test of the "hard currency" policy

  • Michael Dueker
  • Andreas M. Fischer

One simple test of the long-run viability of an exchange-rate peg, which complements tests based on market expectations, is to ask whether the implicit inflation target ofthe pegging country is the same as that of the anchor country. If the implicit inflation targets of the two countries are different, the peg's long-run credibility can be rejected. The implicit inflation target is defined as the policy-implied, trend rate of inflation. The proposed test is applied to the Austrian experience with a 'hard currency' policy aimed at targeting its exchange rate with the Deutsche mark.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1995-005.

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Date of creation: 1995
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Handle: RePEc:fip:fedlwp:1995-005
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  1. Svensson, Lars E O, 1994. "Monetary Policy with Flexible Exchange Rates and Forward Interest Rates as Indicators," CEPR Discussion Papers 941, C.E.P.R. Discussion Papers.
  2. Eduard HOCHREITER & Georg WINCKLER, 1993. "The Advantages of Tying Austria's Hands: The Success of the Hard Currency Strategy," Vienna Economics Papers vie9307, University of Vienna, Department of Economics.
  3. Bennett T. McCallum, 1993. "Specification and Analysis of a Monetary Policy Rule for Japan," NBER Working Papers 4449, National Bureau of Economic Research, Inc.
  4. Svensson, L.E.O., 1990. "The Simplest Test of Target Zone Credibility," Papers 469, Stockholm - International Economic Studies.
  5. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
  6. Vlaar, Peter J G & Palm, Franz C, 1993. "The Message in Weekly Exchange Rates in the European Monetary System: Mean Reversion, Conditional Heteroscedasticity, and Jumps," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 351-60, July.
  7. Michael J. Dueker & Andreas M. Fischer, 1998. "A guide to nominal feedback rules and their use for monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 55-63.
  8. Kim, Chang-Jin, 1993. "Sources of Monetary Growth Uncertainty and Economic Activity: The Time-Varying-Parameter Model with Heteroskedastic Disturbances," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 483-92, August.
  9. Kim, Chang-Jin, 1994. "Dynamic linear models with Markov-switching," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 1-22.
  10. Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S61-82, Suppl. De.
  11. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
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