Probability Analysis of Exchange Rate Target Zones

Huimin Zhao, Fuzhou Gong, Fangping Peng and Qin Liu

International Journal of Financial Research, 2014, vol. 5, issue 1, 29-41

Abstract: The objective of this paper is to show quantitative results for the exchange rate target zones in a small open economy. We develop a stochastic model for exchange rates under the equilibrium in goods and money markets based on a variation of Dornbusch (1976)'s model, incorporating several kinds of macroeconomic shocks and a noneconomic factor ignored by literature. Using the theory of stochastic differential equation (SDE) in probability theory, we calculate the probabilities that the nominal exchange rates reach the boundaries of the target zones for the first time, and the mean time that the nominal exchange rates remain in the target zones. Furthermore, using our explicit expressions of the fundamental factor and the defnite relationships between the variables, we analyze the effects on the probabilities from macroeconomic and non-economic factors, such as the elasticity of the premium rate of exchange rates, the fundamental factor, and the volatilities of the shocks.

Keywords: exchange rate; target zone; probability analysis (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciedu.ca/journal/index.php/ijfr/article/view/3961/2333 (application/pdf)
http://www.sciedu.ca/journal/index.php/ijfr/article/view/3961 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:jfr:ijfr11:v:5:y:2014:i:1:p:29-41

Access Statistics for this article

International Journal of Financial Research is currently edited by Gina Perry

More articles in International Journal of Financial Research from International Journal of Financial Research, Sciedu Press
Bibliographic data for series maintained by Gina Perry ().