Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models
- 1 July 1993
- journal article
- Published by Oxford University Press (OUP) in The Review of Economic Studies
- Vol. 60 (3) , 689-712
- https://doi.org/10.2307/2298131
Abstract
A time-varying stochastic devaluation risk is introduced in a model of exchange rate target zones. The model produces realistic patterns of covariation between exchange rates and interest rate differentials, which previous target zone models have been unable to do. A “drift adjustment” method to estimate devaluation expectations from data is suggested.Keywords
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