A Quasi-Bounded Target Zone Model – Theory and Application to Hong Kong Dollar
17 Pages Posted: 27 Nov 2012 Last revised: 29 Jun 2015
Date Written: June 29, 2015
This paper proposes a quasi-bounded process for exchange rate dynamics within a target zone, consistent with a credible exchange rate band in which the exchange rate cannot breach the strong-side limit while the weak-side limit is only accessible under restricted conditions of the relationship between the parameters of the drift term and stochastic part of the process. The empirical results suggest that this model can describe the dynamics of the Hong Kong dollar, which is operated under a target-zone system, where the drifting force is an increasing function of foreign reserves.
Keywords: stochastics process, target zone, bounded process
JEL Classification: F31, G13
Suggested Citation: Suggested Citation