|
|||||
|
|
Analysis of Exchange-Rate Target Zones Using a Limited-Dependent Rational-Expectations Model With Jumps |
|
| Authors: | M Hashem Pesaran Francisco J Ruge-Murcia |
| Institution: | 1. Trinity College and Faculty of Economics and Politics , University of Cambridge , Cambridge , CB3 9DD , United Kingdom E-mail: hashem.pesaran@econ.cam.ac.uk;2. Departement de Sciences Economiques and C.R.D.E. , Université de Montréal , Montréal , Québec , H3C 3J7 , Canada E-mail: rugemurf@crde.umontreal.ca |
| Abstract: | This article examines the exchange-rate determination in a target-zone regime when the bounds can be fixed for an extended period but are subject to occasional jumps. In this case, the behavior of the endogenous variable is affected 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 probability and indicate that the agents correctly anticipated most of the observed changes in the central parity. |
| Keywords: | Credibility Nonlinear rational-expectations model Realignment probability Stochastic bounds |