Abstract
This paper investigates empirically the relationship between target zone credibility and economic fundamentals using French monthly data for the period 1991:6 to 1998:9. The econometric framework is one which allows expected devaluation (proxied by the interest rates differential) to stochastically switch between a ‘high’ and a ‘low’ phase according to the outcome of a Markov process. The transition probabilities of the Markov process are assumed to vary over time as functions of various monetary and real macroeconomic variables. Our findings suggest that expected devaluation is significantly influenced by foreign reserves and the deviations of the exchange rate from the EMS central parity, whereas the effects of real variables are weak at best.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.