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The Simplest Test of Target Zone Credibility: The Simplest Test of Target Zone Credibility

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  • International Monetary Fund

Abstract

Under the assumption of no arbitrage exchange rate target zone credibility is tested by whether domestic interest rates fall within “rate-of-return bands” between the maximum and minimum home-currency rate of return on a foreign investment absent a devaluation. Under the assumption of uncovered interest rate parity credibility is tested by whether expected future exchange rates fall within the exchange rate band. These tests are applied on data about the Swedish target zone during January 1987-August 1990.

Suggested Citation

  • International Monetary Fund, 1990. "The Simplest Test of Target Zone Credibility: The Simplest Test of Target Zone Credibility," IMF Working Papers 1990/106, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1990/106
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=28028
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    Cited by:

    1. Elias Belessakos & Michael Papaioannou, 1996. "Simple credibility tests of the ERM bands for the pound sterling and the Italian lira," Open Economies Review, Springer, vol. 7(3), pages 219-236, July.

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