Credible Target Research Articles

Exchange rate dynamics in a target zone—A heterogeneous expectations approach

We present a simple behavioral model with chartists and fundamentalists and analyze their trading behavior in both a floating and a target zone exchange rate regime. When applied to the floating regime, the model replicates the well-known stylized facts, such as excess volatility, fat tails, volatility clustering, and exchange rate disconnect. Our main result is that when applied to a credible target zone, our model predicts that the exchange rate remains in the center of the band for a considerable period, even though the fundamental exchange rate does not exhibit mean reversion tendencies. This is consistent with the empirical evidence and contrasts with the traditional target zone model based on Krugman [1991. Target zones and exchange rate dynamics. Quarterly Journal of Economics 16, 669–682], which predicts that the exchange rate in a target zone clusters close to the edges of the band. The hump-shaped distribution of the exchange rate obtained in our model greatly reduces the frequency of central bank intervention. We also conclude that the introduction of a target zone regime significantly reduces exchange rate volatility by decreasing speculative activity in the FX market.

Meta-Iodobenzylguanidine, an Inhibitor of Arginine-Dependent Mono(ADP-ribosyl)ation, Prevents Neointimal Hyperplasia

The association of ADP-ribosylation with cell proliferation and ischemia-reperfusion injury suggests that it may be a suitable target for therapeutic control of revascularization-induced injury. The purpose of this study was to investigate the inhibitory actions of ADP-ribosylation inhibitors on restenosis. In organ culture, the poly(ADP-ribose) polymerase (PARP) inhibitor 3,4-dihydro-5-methylisoquinolinone (PD128763) was unable to prevent neointimal hyperplasia, whereas the arginine-dependent mono(ADP-ribosyl)transferase (ART) inhibitor meta-iodobenzylguanidine (MIBG) was highly effective (EC(50) 21 microM). Treatment with 3-aminobenzamide (3AB), a less potent ART inhibitor, also produced a significant reduction in neointimal hyperplasia. Single doses (25 mM) of MIBG and 3AB were also applied within a fibrin coagulum directly to the adventitial surface of the porcine femoral artery after balloon catheter injury in vivo. MIBG reduced the neointimal index, measured 14 days after angioplasty, by 82%, whereas 3AB was ineffective. However, when extended to 45 days, the neointimal index was not significantly decreased by MIBG treatment relative to control. Assessment of MIBG release from the fibrin glue showed that the bulk of the compound was eluted within 3 days, suggesting that the vehicle was not suitable for long-term delivery. On the other hand, direct infusion of MIBG into vessels was able to reduce neointimal hyperplasia over 14 days in organ culture. These data support the conclusion that the cellular retention characteristics of MIBG contribute significantly to the efficacy of this compound. Based on these results, ART, but not PARP, may be a credible target for therapeutic treatment of restenosis.

Exchange Rate Dynamics in a Target Zone - A Heterogeneous Expectations Approach

We present a simple behavioral model with chartists and fundamentalists and analyze their trading behavior in both a floating and a target zone exchange rate regime. When applied to the floating regime, the model replicates the well-known stylized facts, such as excess volatility, fat tails, volatility clustering and exchange rate disconnect. Our main result is that when applied to a credible target zone, our model predicts that the exchange rate remains in the center of the band for a considerable period, even though the fundamental exchange rate does not exhibit mean reversion tendencies. This is consistent with the empirical evidence and contrasts with the traditional target zone model based on Krugman (1991), which predicts that the exchange rate in a target zone clusters close to the edges of the band. The hump-shaped distribution of the exchange rate obtained in our model greatly reduces the frequency of central bank intervention. We also conclude that the introduction of a target zone regime significantly reduces exchange rate volatility by decreasing speculative activity in the FX market.

Target Zone Exchange Rate Option Pricing

This paper provides a short introduction to the topic of target zone exchange rate option pricing. Models covered include: Black-Scholes equation with derivation, European Call on a stock option, Garman-Kohlhagen model for an option on a free-floating exchange rate, Dumas Jennergren and Naslund model for an exchange rate option within a fully credible target zone and a discussion of the relationship between empirical option pricing data and partial target zone credibility.

Hypoxia-inducible-factor 2 alpha mediates cisplatin resistance in the lung adenocarcinoma cell line A549

10573 Background: Hypoxia in solid tumors is associated with cancer progression, metastasis and resistance to chemotherapy. The hypoxia inducible factors (HIF-1a and HIF-2a) are key players in the response to hypoxia affecting angiogenesis, proliferation and apoptosis. Here we investigated the role of HIF-1a and HIF-2a in cellular resistance to cisplatin in non small lung cancer cells (A549). Results: Hypoxia reduced the efficiency of cisplatin treatment on A549 cells via enhancement of drug efflux activity. In addition, hypoxia induced the hypoxia-responsive-element (HRE) reporter gene assay, demonstrating the transcriptional activity of HIF-1a and HIF-2a. Administration of cisplatin further increased the reporter activity under both normoxic and hypoxic conditions. This correlated with the induction of HIF-2a protein expression upon cisplatin treatment in normoxia and hypoxia, whereas HIF-1a was suppressed. Additionally, cisplatin induced nuclear accumulation of HIF-2a. Suppression of HIF-2a by RNA interference potentiated the sensitivity to cisplatin treatment in hypoxic A549 cells. In vivo growth delay assay gave analogues results for subcutaneous A549 tumors treated with cisplatin and suppression of HIF-2a. In comparison, other cytostatic drugs such as doxorubicin and gemcitabine differed with respect to HIF signalling. Doxorubicin induced both HIF-1a and HIF- 2a. Cellular sensitivity to doxorubicin was increased via suppression of HIF-1a and HIF-2a. Gemcitabine appeared to act independent of HIF. The underlying mechanism of hypoxia-induced resistance was due to increased mRNA expression of drug resistance proteins such as MDR1, MRP1 and LRP. These were found to be HIF-2a but not HIF-1a dependent. Conclusion: This data identified HIF-2a as a key player in the hypoxia induced cisplatin resistance and show on the molecular level that HIF-2a is a credible target for therapeutic strategies. No significant financial relationships to disclose.

Inhibition of neuronal nitric oxide synthase reduces isoflurane MAC and motor activity even in nNOS knockout mice

The glutamate-nitric oxide-cyclic GMP pathway has been identified as a potential target for volatile anaesthetic agents as acute inhibition of nitric oxide synthase (NOS) reduces the minimum alveolar concentration (MAC) in most animal studies. However, mice deficient in the type I NOS isoform (nNOS) are reported to have a similar MAC for isoflurane and are not affected by non-isoform specific inhibitors. We determined whether the nNOS specific inhibitor, 7-nitroindazole (7-NI), had an effect on isoflurane MAC and righting reflex (RRF) and investigated spontaneous motor activity in an open-field study in wild-type (WT) and knockout (KO) mice. 7-NI reduced isoflurane MAC and RRF in both WT and KO animals (all P<0.04). 7-NI profoundly reduced spontaneous motor activity in both the WT and KO animals in the open-field study as indicated by a reduction in the number of line crossings and rearings in both WT and KO mice (both P<0.001). We conclude that isoform specific inhibition of nNOS reduces MAC and spontaneous motor activity even in nNOS KO animals. Our results indicate that the NMDA receptor-nitric oxide-cyclic GMP pathway remains a credible target in modulating the effects of isoflurane.

Silencing of Epidermal Growth Factor Receptor Suppresses Hypoxia-Inducible Factor-2–Driven VHL−/− Renal Cancer

Inactivating mutations in the von Hippel-Lindau (VHL) tumor suppressor gene are associated with clear cell renal cell carcinoma (VHL-/- RCC), the most frequent malignancy of the human kidney. The VHL protein targets the alpha subunits of hypoxia-inducible factor (HIF) transcription factor for ubiquitination and degradation. VHL-/- RCC cells fail to degrade HIF resulting in the constitutive activation of its target genes, a process that is required for tumorigenesis. We recently reported that HIF activates the transforming growth factor-alpha/epidermal growth factor receptor (TGF-alpha/EGFR) pathway in VHL-defective RCC cells. Here, we show that short hairpin RNA (shRNA)-mediated inhibition of EGFR is sufficient to abolish HIF-dependent tumorigenesis in multiple VHL-/- RCC cell lines. The 2alpha form of HIF (HIF-2alpha), but not HIF-1alpha, drives in vitro and in vivo tumorigenesis of VHL-/- RCC cells by specifically activating the TGF-alpha/EGFR pathway. Transient incubation of VHL-/- RCC cell lines with small interfering RNA directed against EGFR prevents autonomous growth in two-dimensional culture as well as the ability of these cells to form dense spheroids in a three-dimensional in vitro tumor assay. Stable expression of shRNA against EGFR does not alter characteristics associated with VHL loss including constitutive production of HIF targets and defects in fibronectin deposition. In spite of this, silencing of EGFR efficiently abolishes in vivo tumor growth of VHL loss RCC cells. These data identify EGFR as a critical determinant of HIF-2alpha-dependent tumorigenesis and show at the molecular level that EGFR remains a credible target for therapeutic strategies against VHL-/- renal carcinoma.

Interest rate interactions in the classical gold standard, 1880–1914: was there any monetary independence?

This paper examines an hypothesis of Svensson (1994) (Journal of Monetary Economics 33, 157–199) that a credible target zone can confer on a country a degree of independence in the operation of its monetary policy, even when exchange rates are fixed. We test this hypothesis for the Classical gold standard using a newly created monthly data base for the period 1880–1913. Building on the recently noted finding that the Classical gold standard represented a credible, well-behaved, target zone system we propose a number of ways of testing the Svensson’ model. Our main finding is that the Classical gold standard did indeed confer some independence in the operation of monetary policy for participating countries. This would seem to have an important bearing on the kind of institutional framework required for a modern day target zone to function effectively and, in particular, to weather speculative attacks.

Inside the Impossible Triangle: Monetary Autonomy in a Credible Target Zone

Inside the Impossible Triangle: Monetary Autonomy in a Credible Target Zone

Credibility and Interest Rate Discretion in the ERM

Recent proposals for reforming the international monetary system often focus on a target zone arrangement for the dollar, euro and yen. Theoretical research suggests that a credible target zone confers on a participant some short-run discretion in the setting of interest rates, and recent empirical research suggests that this was indeed the case for the Classical gold standard, perhaps the best example of a credible target zone. In this paper we examine the extent of short-run interest rate discretion (SRID) conferred by another experiment with target zones, namely the ERM experience. Amongst our findings is the result that countries that had a credible commitment to the ERM did indeed have SRID.

The Evolution of Thought on Intermediate Exchange Rate Regimes

This article traces the origins and evolution of proposals for exchange-rate regimes intermediate between fixed and floating rates. The origins are traced to Keynes's interwar writings. Keynes's ideas were revived in the 1960s literature on the (wide) band proposal and crawling peg and developed in the 1970s by the literatures on the reference rate proposal and optimal peg. The target zone proposals of the 1980s combined the band proposal and the crawling peg. Paul Krugman showed that a credible target zone would make speculation stabilizing. In the 1990s, a number of emerging markets employed such regimes until they were swept away in crises. This spawned the bipolar view, which asserts that in a world of capital mobility, countries have to choose between firmly fixed and freely floating rates. The article concludes by arguing that even the most attenuated form of intermediate regime, the reference rate proposal, would carry advantages over a floating regime.

Does the Nominal Exchange Rate Regime Matter for Investment?

This paper analyses the impact of exchange rate uncertainty upon the pattern of investment in different exchange rate regimes (very hard pegs, intermediate regimes, and floats) by means of a unified approach. The comparison of different exchange rate regimes indicates that currency volatility exerts only a small influence upon the level of investment spending. On the other hand, firms turn out to be more cautious about responding to exchange rate shocks in a credible target zone model than in a flexible exchange rate regime or in a target zone model with stochastic realignments.

The Louvre Accord and central bank intervention: was there a target zone?

This paper presents an empirical analysis of central bank intervention during the 10-month period following the Louvre Accord. We first examine whether the Bank of Japan and the Federal Reserve adopted a target zone in order to stabilize the yen–dollar exchange rate, by using daily foreign exchange intervention data. We then estimate the expected future exchange rate and the expected rate of devaluation in order to verify if there was a credible target zone. On the basis of these two tests, we conclude that the central banks did adopt a target zone during the period following the Louvre Accord, but that the target zone for the yen–dollar exchange rate was not credible.

Exchange rate target zones and stock price volatility

We show how agents’ rational expectations regarding the state-contingent activation of policy instruments do not only impact the asset price it is designed to affect but spill over onto the entire range of asset prices in an economy. We present an application to exchange rate target zones as a state-contingent instrument for monetary policy. In particular we find that any explicit credible target zone for the exchange rate is associated with an implicit target zone for the stock price where the non-linearity of the exchange rate function translates into a corresponding stabilizing non-linearity of the stock price path. Copyright © 1999 John Wiley & Sons, Ltd.

The term structure of interest rates in a sticky-price target zone model

The term structure of interest rates in a sticky-price target zone model with perfectly credible marginal central bank intervention is identified by means of an arbitage-free valuation. We find that an explicit credible target zone for the exchange rate is associated with an implicit target zone for the long-term interest rate where the nonlinearity of the exchange rate function translates into a corresponding stabilizing nonlinearity of the long-term interest rate. Imposing a target zone reduces the variability of short-term and long-term interest rates and induces a steeper term structure relative to freely floating exchange rates.

Nonfundamental FX trading and excess volatility in credible target zones Theory and empirical evidence

This paper presents a target zone model with imperfect asset substitutability in which exchange rates are driven both by expectations regarding the credible defense of the currency band and foreign exchange traders' stop-loss trading strategies. The model generates excess volatility and nonuniqueness in the density function of the exchange rate. These results obtain independently of whether the stop-loss strategies are known to the market. In an empirical section, the authors find support for the existence of excess volatility for selected countries of the European monetary system (EMS) during the stable EMS period.

Implied exchange rate distributions: evidence from OTC option markets

This paper uses a rich new dataset of option prices on the dollar-mark, dollar-yen, and key EMS cross-rates to extract the entire risk-neutral probability density function (pdf) over horizons of 1 and 3 months. We compare three alternative smoothing methods — cubic splines, an implied binomial tree (trimmed and untrimmed), and a mixture of lognormals — for transforming option data into the pdf. Despite their methodological differences, the three approaches lead to a similar pdf clearly distinct from the lognormal benchmark, and typically characterized by skewness and leptokurtosis. We then document a striking positive correlation between skewness in these pdfs and the spot rate. The stronger a currency the more expectations are skewed towards a further appreciation of that currency. We interpret this finding as a rejection that innovations in these exchange rates are independent of the level, or characteristic of a credible target zone, explicit or implicit. Instead, this positive correlation is consistent with target zones with endogenous realignment risk. We discuss two interpretations of our results on skewness: when a currency is stronger, the actual probability of further large appreciation is higher, or because of risk, such states are valued more highly.

An arbitrage free trilateral target zone model

This paper proposes an arbitrage free trilateral model of a credible target zone regime with bands on each bilateral exchange rate. The no arbitrage condition reduces the system to only two dimensions. Any two rates must obey their own boundaries but, in addition, the free rein for movements is restricted by the band of the redundant rate. Therefore, target zone models defined in bilateral settings do not apply to general systems with a cobweb of bilateral bands, such as the European Monetary System. Since the model has no known analytical solution it is estimated by the method of simulated moments.

Tests for Nonlinearity in EMS Exchange Rates

This paper tests for nonlinearity in EMS exchange rates using the bispectrum. The early experience of the ERM witnessed numerous realignments. We find that exchange rates follow a linear process over the period 1979-1987, consistent with the predictions of the realignment target zone model, where a stabilizing nonlinearity is absent. But from 1987-1992, no realignments occurred, and many currencies conformed to a nonlinear process, consistent with the credible target zone model where an inherent nonlinearity stabilizes exchange rates. However, the Italian lira and the Irish pound follow a linear process, which suggests that a target zone has not proven effective in stabilizing exchange rates.

Simple tests of target zones: the Irish case

In a small open economy with fixed exchange rates, tandard theory suggests that domestic inflation and interest rates should equal those abroad. In a credible target zone, the same theories suggest that inflation and interest rates should be ‘close’. Here, we seek to make precise this idea of limits on inflation and interest rate differentials consistent with limits on exchange rate movements. We then examine the case of Ireland, which joined the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS) in 1979 attracted by the prospects of lower, German influenced, inflation and interest rates. We find in the early years of the ERM, both Irish inflation and interest rastes were inconsistent with credibility of the exchange rate regime; in he latter years, from 1987 on, rates were in the derived range around German rates.