STOCHASTIC DEVALUATION RISK AND THE EMPIRICAL FIT OF TARGET-ZONE MODELS

Authors
BERTOLA G SVENSSON LEO
Citation
G. Bertola et Leo. Svensson, STOCHASTIC DEVALUATION RISK AND THE EMPIRICAL FIT OF TARGET-ZONE MODELS, Review of Economic Studies, 60(3), 1993, pp. 689-712
Citations number
22
Categorie Soggetti
Economics
Journal title
Review of Economic Studies → ACNP
ISSN journal
00346527
Volume
60
Issue
3
Year of publication
1993
Pages
689 - 712
Database
ISI
SICI code
0034-6527(1993)60:3<689:SDRATE>2.0.ZU;2-9
Abstract
A time-varying stochastic devaluation risk is introduced in a model of exchange rate target zones. The model produces realistic patterns of covariation between exchange rates and interest rate differentials, wh ich previous target zone models have been unable to do. A ''drift adju stment'' method to estimate devaluation expectations from data is sugg ested.