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Bayesian Soft Target Zones

  • Forbes, C.S.
  • Kofman, P.

Several authors have postulated econometric models for exchange rates restricted to lie within known target zones. However, it is not uncommon to observe exchange rate data with known limits that are not fully 'credible'; that is, where some of the observations fall outside the stated range. An empirical model for exchange rates in a soft target zone where there is a controlled probability of the observed rates exceeding the stated limits is developed in this paper. A Bayesian approach is used to analyse the model, which is then demonstrated on Deutschemark-French franc and ECU-French franc exchange rate data.

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Paper provided by Monash University, Department of Econometrics and Business Statistics in its series Monash Econometrics and Business Statistics Working Papers with number 4/00.

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Length: 23 pages
Date of creation: Apr 2000
Date of revision:
Handle: RePEc:msh:ebswps:2000-4
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  1. Wren-Lewis, Simon, 1997. "The Choice of Exchange Rate Regime," Economic Journal, Royal Economic Society, vol. 107(443), pages 1157-68, July.
  2. Jacob A. Frenkel & Morris Goldstein, 1986. "A Guide to Target Zones," NBER Working Papers 2113, National Bureau of Economic Research, Inc.
  3. Kees G. Koedijk & Philip A. Stork & Casper G. De Vries, 1998. "An EMS target zone model in discrete time," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(1), pages 31-48.
  4. Bruce Mizrach, 1993. "Target zone models with stochastic realignments: an econometric evaluation," Research Paper 9302, Federal Reserve Bank of New York.
  5. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
  6. Honohan, Patrick, 1998. "A pitfall in computing exchange rate density in the EMS band," Journal of International Money and Finance, Elsevier, vol. 17(5), pages 839-853, October.
  7. Kofman, Paul & de Vaal, Albert & de Vries, Casper G., 1993. "Fixing soft margins," Journal of International Economics, Elsevier, vol. 34(3-4), pages 359-374, May.
  8. Marcus Miller & Paul Weller, 1991. "Currency Bands, Target Zones, and Price Flexibility," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 184-215, March.
  9. Bekaert, Geert & Gray, Stephen F., 1998. "Target zones and exchange rates:: An empirical investigation," Journal of International Economics, Elsevier, vol. 45(1), pages 1-35, June.
  10. Alejandro M. Werner, 1996. "Target Zones and Realignment Expectations: The Israeli and Mexican Experiences," IMF Staff Papers, Palgrave Macmillan, vol. 43(3), pages 571-586, September.
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