Exchange rate target zone models: a Bayesian evaluation

✍ Scribed by Kai Li

• Publisher: John Wiley and Sons
• Year: 1999
• Tongue: English
• Weight: 356 KB
• Volume: 14
• Category: Article
• ISSN: 0883-7252
• DOI: 10.1002/(sici)1099-1255(199909/10)14:5<461::aid-jae540>3.0.co;2-z

✦ Synopsis

This paper develops a Bayesian approach to estimating exchange rate target zone models and rational expectations models in general. It also introduces a simultaneous-equation target zone model that incorporates stochastic realignment risk. Using FF/DM and IL/DM exchange rate data, we ®nd that the signing of the 1987 Basle±Nyborg Agreement reduces both the magnitude and the likelihood of a central parity realignment, while the lagged exchange rate deviation from its central parity increases them. Furthermore, the interest rate policies and the monetary conditions of the participating countries signal a forthcoming realignment. In general, we are unable to improve upon a simple random walk model in out-ofsample exchange rate prediction by introducing target zone models.