An EMS Target Zone Model in Discrete Time
Journal of Applied Econometrics, Vol. 13, pp. 31.48, 1998
Posted: 28 Feb 2008
The discrete time analogue of the continuous time Krugman target zone model is developed in order to capture the typical volatility clusters and fat-tailed distributed innovations of exchange rates. It is shown that under these more general stochastic conditions the S-shaped relation between exchange rate fundamentals is preserved, but is less pronounced. The model is tested for its S-shape and stochastic properties. Two clearly distinct sets of EMS currencies are detected on the basis of curvature features. One-step-ahead realignment probabilities are used as an alternative evaluation method.
Keywords: EMS currencies, fat tails, realignment probability
JEL Classification: G10, G15
Suggested Citation: Suggested Citation