01950cam a22002177 4500001000600000003000500006005001700011008004100028100002400069245014300093260006600236490004100302500001800343520104700361530006101408538007201469538003601541710004201577830007601619856003701695w3374NBER20140424200456.0140424s1991 mau||||fs|||| 000 0 eng d1 aSvensson, Lars E.O.14aThe Term Structure of Interest Rate Differentials in a Target Zoneh[electronic resource]:bTheory and Swedish Data /cLars E.O. Svensson. aCambridge, Mass.bNational Bureau of Economic Researchc1991.1 aNBER working paper seriesvno. w3374 aOctober 1991.3 aThe term structure of interest rate differentials is derived in a model of a small open economy with a target zone exchange rate regime. The target zone is modeled as a regulated Brownian motion. The interest rate differentials are computed as the solution to a parabolic partial differential equation with derivative boundary conditions, both via a Fourier-series analytical solution and via a direct numerical solution. Several specific properties of the term structure of interest rate differentials are derived. For instance, for given time to maturity the interest rate differential is decreasing in the exchange rate, and for given exchange rate the interest rate differential's absolute value and its instantaneous variability are both decreasing in the time to maturity. Devaluation/realignment risks are incorporated and imply upward shifts of the interest rate differentials. Some implications of the theory are found to be broadly consistent with data on Swedish exchange rates and interest differentials for the period 1986-1989. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w3374.4 uhttp://www.nber.org/papers/w3374