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Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models.

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. Copyright 1993 by The Review of Economic Studies Limited.
Year of publication:
1993
Authors: Bertola, Giuseppe ; Svensson, Lars E O
Published in:
Review of Economic Studies. - Wiley Blackwell, ISSN 0034-6527. - Vol. 60.1993, 3, p. 689-712
Publisher: Wiley Blackwell
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Type of publication: Article
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Persistent link: https://www.econbiz.de/10005251220
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