A UNIVARIATE ANALYSIS OF EMS EXCHANGE-RATES USING A TARGET ZONE MODEL

The models in the literature on ''change-rate target zones imply a non -linear time series model for the exchange rate. We show how the param eters of such models can be estimated and develop Maximum Likelihood a nd Method of Simulated Moments estimators for the target zone model of Krugman (1991). The Maximum Likelihood estimator is based on a comput ationally attractive approximation to the exact predictive density of the continuous time model. Monte Carlo experiments are used to assess the properties of this estimator. In the empirical part we estimate th e model with data on recent EMS exchange rates. We find that the Krugm an (1991) target zone model is not able to explain the full observed k urtosis and conditional heteroscedasticity of the exchange-rate return s.