Estimating Expected Exchange Rates Under Target Zone Regimes

Zhaohui Chen and Alberto Giovannini
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Zhaohui Chen: Research Department, International Monetary Fund, Washington, DC 20431, USA;
Alberto Giovannini: Long Term Capital Management, London, UK;

International Journal of Theoretical and Applied Finance (IJTAF), 1998, vol. 01, issue 01, 43-59

Abstract: This paper develops a simple econometric procedure for estimating expected exchange rate under target zones. We employ the linear projection methodology to make predictions without relying on any prior structural or distributional assumptions, and at the same time demonstrate that such a methodology has to be modified in an important way to account for the presence of the target zone band. The method is applied to test the credibility of exchange rate regimes and to estimate the unannounced band. Our empirical results show that the band effect is nontrivial for narrow target zones such as those in the Bretton Woods system.

Keywords: JEL classification code: F33; F31; C24 (search for similar items in EconPapers)
Date: 1998
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:01:y:1998:i:01:n:s0219024998000047

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DOI: 10.1142/S0219024998000047

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