Devaluation Risk in Target Zones: Evidence from the Nordic Countries

Per-Anders Edin and Anders Vredin ()

Economic Journal, 1993, vol. 103, issue 416, 161-75

Abstract: In this paper, the authors estimate devaluation risk in Denmark, Finland, Norway, and Sweden. The target exchange ra te is modeled as a censored variable, a "shadow peg" that is only observed when the equilibrium floating rate is too far from the prevailing peg. Using a two-step procedure, the authors are able to calculate time series of the probability and expected size of devaluations. Th e probability as well as the size of devaluations seem to be systematically related to a relation between the money stock, industrial production, foreign exchange reserves, and the prevailing central parity. Copyright 1993 by Royal Economic Society.

Date: 1993
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Working Paper: Devaluation Risk in Target Zones: Evidence from the Nordic Countries (1991)
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