Repegging of the Lats to the Euro: Implications for the Financial Sector

Viktors Ajevskis () and Armands Pogulis

No 2005/01, Working Papers from Latvijas Banka

Abstract: The paper is a generalisation of L. E. O. Svensson's simplest test of target zone credibility and the drift-adjustment method in the context of anticipated planned repegging. In 1994, the Latvian lats was pegged to the SDR basket of currencies but on 30 December 2004 the lats was pegged to the euro maintaining the existing exchange rate and fluctuation band of ±1% around the peg rate. Three currencies and two time intervals have been used leading to the generalisation of uncovered interest parity and necessitating the use of forward interest rates.

Keywords: planned repegging; exchange rate target zone; credibility; market interest rate; arbitrage opportunities (search for similar items in EconPapers)
JEL-codes: D84 E43 E58 F31 G15 (search for similar items in EconPapers)
Date: 2005-06-28
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