Analysis of exchange-rate target zones using a limited-dependent rational-expectations model with jumps

This article examines the exchange-rate determination in a target-zone regi me when the bounds can be fixed for an extended period but are subject to o ccasional jumps. In this case, the behavior of the endogenous variable is a ffected by the agents' expectations about both the occurrence and the size of the jump. Empirical results using data for the franc/mark exchange rate provide support for the nonlinear model with time-varying realignment proba bility and indicate that the agents correctly anticipated most of the obser ved changes in the central parity.