Estimating Expected Exchange Rates Under Target Zones

43 Pages Posted: 22 Apr 2004

See all articles by Zhaohui Chen

Zhaohui Chen

International Monetary Fund (IMF)

Alberto Giovannini

Columbia University - Columbia Business School

Date Written: January 1992

Abstract

This paper develops a simple econometric procedure for estimating expected exchange rate under target zones. We employ the linear projection methodology to make predictions without relying on any prior structural or distributional assumptions, and at the same time demonstrate that such a methodology has to be modified in an important way to account for the presence of the fluctuation band. Our empirical results show that the band effect is nontrivial for narrow target zones such as the Bretton Woods system. We also develop a method to estimate the shapes of the unconditional distributions of exchange rates under target zones. The empirical results show that the unconditional distributions of exchange rates can take several different shapes, which may correspond to possibly widely different monetary and exchange-rate intervention policies. We also show how to use the projection equations and the information about the band to test the credibility of the exchange rate regimes.

Suggested Citation

Chen, Zhaohui and Giovannini, Alberto, Estimating Expected Exchange Rates Under Target Zones (January 1992). NBER Working Paper No. w3955, Available at SSRN: https://ssrn.com/abstract=291744

Zhaohui Chen (Contact Author)

International Monetary Fund (IMF) ( email )

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Washington, DC 20431
United States
202-623-6480 (Phone)
202-623-4740 (Fax)

Alberto Giovannini

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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