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In the context of a flexible-price monetary exchange rate model and the assumption of uncovered interest parity, we obtain a measure of the fundamental determinant of exchange rates. Daily data for the European Monetary System are used to explore the importance of nonlinearities in the relationship between the exchange rates and fundamentals. Many implications of existing quot;target-zonequot; exchange rate models are tested; little support is found for existing nonlinear models of limited exchange rate flexibility.
In the context of a flexible-price monetary exchange rate model and the assumption of uncovered interest parity, we obtain a measure of the fundamental determinant of exchange rates. Daily data for the European Monetary System are used to explore the importance of nonlinearities in the relationship between the exchange rates and fundamentals. Many implications of existing “target-zone” exchange rate models are tested; little support is found for existing nonlinear models of limited exchange rate flexibility.
In the context of a flexible-price monetary exchange rate model and the assumption of uncovered interest parity, we obtain a measure of the fundamental determinant of exchange rates. Daily data for the European Monetary System are used to explore the importance of non-linearities in the relationship between the exchange rates and fundamentals. Many implications of existing quot;target-zonequot; exchange rate models are tested; little support is found for existing non-linear models of limited exchange rate flexibility.
El objetivo del trabajo es determinar las variables fundamentales que explican la evolucion de los tipos de cambio nominales, estudiando especificamente las relaciones no lineales en un modelo de tipos de cambio con precios flexibles. Realiza una evaluacion del modelo utilizando datos diarios del SME sobre los que aplica analisis grafico, tests de hipotesis, y analisis de prevision. El resultado es la imposibilidad de caracterizar la evolucion de los tipos y la nula ventaja de los modelos no lineales sobre los lineales. Incluye los graficos resultantes del tratamiento econometrico.(jha).
Inhaltsangabe:Zusammenfassung: Währungskrisen, wie die des Europäischen Währungssystems (EWS) 1992, können noch immer nur unzureichend vorausgesagt werden. Es wird jedoch anerkannt, dass die Glaubwürdigkeit eines jeden Währungssystems ausschließlich endogen bestimmt wird, d.h. durch Interaktion der einzelnen Akteure an den Wechselkursmärkten. Die vorliegende Arbeit untersucht, ob ein bestimmtes Glaubwürdigkeitsmaß, eingeführt von Avesani, Gallo und Salmon (1995), geeignet ist, die große EWS Krise 1992 vorauszusagen. Dabei handelt es sich um ein dynamisches Spiel, in dem die beiden Akteure (Zentralbank und Finanzmarkt) miteinander interagieren und damit die Glaubwürdigkeit des Systems aushandeln . Es wird gezeigt, dass o.g. Glaubwürdigkeitsmaß ein geeigneter Indikator für Währungskrisen darstellt, was empirisch anhand des französischen Francs, der italienischen Lira und des niederländischen Guldens nachgewiesen wird. Introduction: The objective of the present study is to present the literature of exchange rate target zones and to explore empirically the Avesani-Gallo-Salmon credibility measure for selected currencies belonging to the Exchange-Rate Mechanism (ERM) of the European Monetary System (EMS). In the past decade the empirical literature on real world target zones mushroomed considerably, but still, its overall significance in explaining strains in the relevant foreign exchange markets remains relatively low. In this context, I will explore whether the Avesani-Gallo-Salmon (1995) credibility measure demonstrates more power than earlier studies in the analysis of the 1992/3 EMS crisis. It is not my intention to pursue a normative analysis whether flexible or fixed exchange rates or intermediate regimes are superior to one another in terms of their economic implications. This question is beyond the scope of my analysis.1 Given that target zones are applied frequently in the real world, I purely want to figure out, whether their application is sensible on grounds of a firm commitment of the policy-makers. Exchange rate bands have been discussed widely after the breakdown of the Bretton Woods System in 1973. Although experiences with the fixed exchange rate regime were disappointing in the 1960s, increased volatility and/or overshooting of the exchange rates in the 1970s let economists doubt the famous argument by Friedman (1953) that speculation would stabilize exchange rate movements in the floating system. McKinnon (1976) reckoned that [...]
In the context of a flexible-price monetary exchange rate model and the assumption of uncovered interest parity, we obtain a measure of the fundamental determinant of exchange rates. Daily data for the European Monetary System are used to explore the importance of non-linearities in the relationship between the exchange rates and fundamentals. Many implications of existing "target-zone" exchange rate models are tested; little support is found for existing non-linear models of limited exchange rate flexibility
The purpose of this paper is to implement empirically the new theory of exchange rate targeting. The theory formulates an expectations induced relationship between the exchange rate and the fundamental subject to random shocks and target zone constraints. By using monthly data for a representative small-open economy (Israel in the 1980s) the empirical analysis identifies the special roled played by policy and market fundamentals in the behavior of the exchange rate.
In this paper we develop an empirical model of exchange rates in a target zone. The model is general enough to nest most theoretical and empirical models in the existing literature. We find evidence of two types of jumps in exchange rates. Realignment jumps are those that are associated with the periodic realignments of the target zone and within-the-band jumps are those that can be accommodated within the current target zone. The exchange rate may jump outside the current target zone band, in the case of a realignment, but when no jump occurs the target zone is credible (there is zero probability of a realignment) and the exchange rate must stay within the band. We incorporate jumps, in general, by conditioning the distribution of exchange rate changes on a jump variable where the probability and size of a jump vary over time as a function of financial and macroeconomic variables. With this more general model, we revisit the empirical evidence from the European Monetary System regarding the conditional distribution of exchange rate changes, the credibility of the system, and the size of the foreign exchange risk premia. In contrast to some previous findings, we conclude that the FF/DM rate exhibits considerable non-linearities, realignments are predictable and the credibility of the system did not increase after 1987. Moreover, our model implies that the foreign exchange risk premium becomes large during speculative crises. A comparison with the Deutschemark/Dollar rate suggests that an explicit target zone does have a noticeable effect on the time-series behavior of exchange rates.