Targeting the Exchange Rate: An Empirical Investigation
55 Pages Posted: 4 Jul 2004 Last revised: 15 Jul 2010
Date Written: March 1991
The purpose of this paper is to implement empirically a variant of the new theory of exchange rate targeting, suitable for high inflation small open economies. The theory formulates an expectations induced relationship between the exchange rate and the fundamental subject to random shocks and target zone constraints on rates of depreciation. The empirical analysis identifies the roles played by policy and market fundamentals in foreign exchange markets, and estimate the key parameters of the exchange rate dynamic equation.
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