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Testing the bounds: Empirical behavior of target zone fundamentals

J. Miller ()

Economic Modelling, 2011, vol. 28, issue 4, 1782-1792

Abstract: Standard target zone exchange rate models are based on nonlinear functions of unobserved economic fundamentals, which are assumed to be bounded, similarly to the target zone exchange rates themselves. Using a novel estimation and testing strategy, I show how this key but often overlooked assumption may be tested. Empirical results cast doubt on its validity in practice, providing a reason for well-documented empirical difficulties of these models in the literature.

Keywords: Target; zone; exchange; rates; Economic; fundamental; Unscented; Kalman; filter; Rescaled; range; statistic (search for similar items in EconPapers)
Date: 2011
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Working Paper: Testing the Bounds: Empirical Behavior of Target Zone Fundamentals (2009) Downloads
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