Target Zones and Forward Rates in a Model with Repeated Realignments

Gordon Bodnar and Leonardo Bartolini

No 1992/022, IMF Working Papers from International Monetary Fund

Abstract: This paper studies the implications of the imperfect credibility of an exchange rate target zone on the term structure of forward premia. The relationship between spot and forward exchange rates of different maturities reflects the possibility of repeated realignments of the exchange rate band. The credibility of the commitment to the target zone implicit in forward market data can be extracted by estimating the model. Application to French/German data indicates that the model is capable of matching observed patterns of interest rate differentials during the EMS, while yielding estimates of the credibility parameters that accord with the experience of the FF/DM exchange rate during the 1980s.

Keywords: WP; exchange rate; central bank; forward rate; spot exchange rate solution; interest rate differential; exchange rate band; premia--spot exchange rate relationship; forward market; Managed exchange rates; Exchange rates; Spot exchange rates; Crawling peg; Forward exchange rates (search for similar items in EconPapers)
Pages: 54
Date: 1992-03-01
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Citations: View citations in EconPapers (20)

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Journal Article: Target zones and forward rates in a model with repeated realignments (1992)
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