EMPIRICAL FEATURES OF THE SECOND-GENERATION TARGET ZONE MODELS: MEAN-REVERTING FUNDAMENTALS AND ENDOGENOUS DEVALUATION RISK |
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| Authors: | Klaas H. W. Knot Theo K. Dijkstra Jakob De Haan |
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| Affiliation: | Economist, European I Department, International Monetary Fund, 20431 Washington, D.C. Phone 1–202-623-8549, Fax 1–202-623-8832 E-mail;Associate Professor, Department of Economics, University of Groningen, P.O. Box 800, 9700 AV Groningen, The Netherlands, Phone 31 50 3634532, Fax 31 50 3637337, E-mail;Professor, Department of Economics, University of Groningen, P.O. Box 800, 9700 AV Groningen, The Netherlands, Phone 31 50 3633706 Fax 31 50 3637337, E-mail |
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| Abstract: | ![]()
We show that within Bertola and Svensson's second-generation target zone model, mean-reverting interventions and endogenous devaluation risk are closely interrelated. Over the period 1983–93 we analyze the degree of mean reversion in the underlying fundamental process as well as the term structure of interest rate differentials vis-à-vis Germany for six Exchange Rate Mechanism currencies. For Austria, Denmark and the Netherlands, and for Belgium after 1990 our estimates are broadly in line with the first-generation target zone model, whereas those for France and Italy are in accordance with the model that allows for endogenous devaluation risk. ( JEL F3 1, E43) |
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