NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Estimating Expected Exchange Rates Under Target Zones

Zhaohui Chen, Alberto Giovannini

NBER Working Paper No. 3955
Issued in January 1992
NBER Program(s):   ITI   IFM

This paper develops a simple econometric procedure for estimating expected exchange rate under target zones. We employ the linear projection methodology to make predictions without relying on any prior structural or distributional assumptions, and at the same time demonstrate that such a methodology has to be modified in an important way to account for the presence of the fluctuation band. Our empirical results show that the band effect is nontrivial for narrow target zones such as the Bretton Woods system. We also develop a method to estimate the shapes of the unconditional distributions of exchange rates under target zones. The empirical results show that the unconditional distributions of exchange rates can take several different shapes, which may correspond to possibly widely different monetary and exchange-rate intervention policies. We also show how to use the projection equations and the information about the band to test the credibility of the exchange rate regimes.

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Document Object Identifier (DOI): 10.3386/w3955

Published: Chen, Z. and A. Giovannini. "Target Zones And The Distribution Of Exchange Rates: An Estimation Method," Economics Letters, 1992, v40(1), 83-89.

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