An Empirical Exploration of Exchange Rate Target-Zones
68 Pages Posted: 25 May 2006 Last revised: 8 Mar 2021
Date Written: December 1990
In the context of a flexible-price monetary exchange rate model and the assumption of uncovered interest parity, we obtain a measure of the fundamental determinant of exchange rates. Daily data for the European Monetary System are used to explore the importance of non-linearities in the relationship between the exchange rates and fundamentals. Many implications of existing "target-zone" exchange rate models are tested; little support is found for existing non-linear models of limited exchange rate flexibility.
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