An Empirical Exploration of Exchange Rate Target-Zones
Robert P. Flood, Andrew K. Rose, Donald J. Mathieson
In the context of a flexible-price monetary exchange rate model and the assumption of uncovered interest parity, we obtain a measure of the fundamental determinant of exchange rates. Daily data for the European Monetary System are used to explore the importance of non-linearities in the relationship between the exchange rates and fundamentals. Many implications of existing "target-zone" exchange rate models are tested; little support is found for existing non-linear models of limited exchange rate flexibility.
Published: Carnegie-Rochester Conference Series on Public Policy, 1991.