Perfect and Imperfect Credibility : A Brazilian Target Zone Analysis

This paper empirically investigates the credibility of the Brazilian exchange rate target zone implemented from March 10, 1995 to January 15, 1999 using the drift-adjustment method developed by Bertola and Svensson (1993). The model estimation does not accept the perfect credibility hypothesis, although it shows some evidence of imperfect credibility. The Brazilian interest rate differential does not capture the expected Brazilian currency devaluation, which is similar to the Chilean, Israelian and Mexican exchange rate target zones results