English, Article, Journal or magazine article edition: The Simplest Test of Target Zone Credibility Lars E.O. Svensson

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Bookmark: http://trove.nla.gov.au/version/141185
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • The Simplest Test of Target Zone Credibility
Author
  • Lars E.O. Svensson
Physical Description
  • preprint
Notes
  • A credible target zone exchange rate regime with a given exchange rate band implies bounds on the amount of depreciation and appreciation of the domesticcurrency. This implies, for given foreign interest rates, bounds on the domestic-currency rate of return on foreign investment: a rate-of-return band for each time to maturity. Whether domestic interest rates are outside these rate-of-return bands can be used as a simple test of exchange rate credibility, under the assumption of sufficient international capital mobility. This test is applied to the Swedish target zone during February 1986-February 1990. Under the additional assumption of uncovered interest rate parity, an equivalent test is whether expected future exchange rates are outside the exchange rate band. In addition, the expected future exchange rates are used to give an estimate of the probability of future devaluations.
  • RePEc:nbr:nberwo:3394
Language
  • English
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