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Devaluation Risk in Target Zones: Evidence from the Nordic Countries

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  • Edin, P.A.
  • Vredin, A.

Abstract

In this paper, the authors estimate devaluation risk in Denmark, Finland, Norway, and Sweden. The target exchange ra te is modeled as a censored variable, a "shadow peg" that is only observed when the equilibrium floating rate is too far from the prevailing peg. Using a two-step procedure, the authors are able to calculate time series of the probability and expected size of devaluations. Th e probability as well as the size of devaluations seem to be systematically related to a relation between the money stock, industrial production, foreign exchange reserves, and the prevailing central parity. Copyright 1993 by Royal Economic Society.
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Suggested Citation

  • Edin, P.A. & Vredin, A., 1991. "Devaluation Risk in Target Zones: Evidence from the Nordic Countries," Papers 1991g, Uppsala - Working Paper Series.
  • Handle: RePEc:fth:uppaal:1991g
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    Keywords

    financial market ; exchange rate;

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