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Foreign Exchange and Money Markets in the Context of the Exchange Rate Target Zone

Author

Listed:
  • Viktors Ajevskis

    (Bank of Latvia)

  • Armands Pogulis

    (Bank of Latvia)

  • Gunars Berzins

    (Bank of Latvia)

Abstract

The paper has assessed market participants' confidence in the national currency of Latvia in the period between January 2001 and April 2003 using as the basis the position of the lats interest rates within the interest rate corridor. For the purpose of the study, the method of Lars E. O. Svensson was modified taking into account quoted interest rates and exchange rates as well as using the simple interest rate calculation. For the term of up to 1 year, arbitrage opportunities in Latvia's foreign exchange and money markets, likely to arise from the absence of money market participants' confidence in the existing foreign exchange corridor, have not been observed. The assessment of Latvia's money market participants does not signal any realignment possibility for the foreign exchange regime within the coming year.

Suggested Citation

  • Viktors Ajevskis & Armands Pogulis & Gunars Berzins, 2004. "Foreign Exchange and Money Markets in the Context of the Exchange Rate Target Zone," Working Papers 2004/01, Latvijas Banka.
  • Handle: RePEc:ltv:wpaper:200401
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    References listed on IDEAS

    as
    1. Lars E. O. Svensson, 1991. "The Simplest Test of Target Zone Credibility," IMF Staff Papers, Palgrave Macmillan, vol. 38(3), pages 655-665, September.
    2. Garber, Peter M. & Svensson, Lars E.O., 1995. "The operation and collapse of fixed exchange rate regimes," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 36, pages 1865-1911 Elsevier.
    3. Flood, Robert P. & Rose, Andrew K. & Mathieson, Donald J., 1991. "An empirical exploration of exchange-rate target-zones," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 35(1), pages 7-65, January.
    4. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 669-682.
    5. Svensson, Lars E. O., 1993. "Assessing target zone credibility : Mean reversion and devaluation expectations in the ERM, 1979-1992," European Economic Review, Elsevier, vol. 37(4), pages 763-793, May.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Viktors Ajevskis & Armands Pogulis, 2005. "Repegging of the Lats to the Euro: Implications for the Financial Sector," Working Papers 2005/01, Latvijas Banka.

    More about this item

    Keywords

    exchange rate target zone; credibility; market interest rate; arbitrage opportunities;

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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