Target Zones and Forward Rates In a Model With Repeated Realignments
Gordon M. Bodnar
Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS)
IMF Working Paper No. 92/22
This paper studies the implications of the imperfect credibility of an exchange rate target zone on the terra structure of forward premia. The relationship between spot and forward exchange rates of different maturities reflects the possibility of repeated realignments of the exchange rate band. The credibility of the commitment to the target zone implicit in forward market data can be extracted by estimating the model. Application to French/German data indicates that the model is capable of matching observed patterns of interest rate differentials during the EMS, while yielding estimates of the credibility parameters that accord with the experience of the FF/DM exchange rate during the 1980s.
Number of Pages in PDF File: 54
JEL Classification: F31, F33, G15working papers series
Date posted: February 15, 2006
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