In exchange rate target zone models the commitment of policymakers to intervene at the boundaries of the band gives rise to speculation which stabilizes exchange rates within the band. The empirical implications of such stochastic process switching are discussed and their relevance for the...

Stylized empirical facts about the correlation between the volume of international trade and exchange rate variability/uncertainty are at odds with the predictions of the simple open economy model. The present paper argues that this puzzle may be explained by drawing on the recent theoretical...

We present a simple behavioral model with chartists and fundamentalists and analyze their trading behavior in a floating regime and in a target zone regime. Regarding the floating regime the model replicates the well-known stylized facts like excessive volatility, fat tails, volatility...

This paper develops a simple econometric procedure for estimating expected exchange rate under target zones. We employ the linear projection methodology to make predictions without relying on any prior structural or distributional assumptions, and at the same time demonstrate that such a...

I show that parity realignments alone do not suffice to ensure the long-run sustainability of an exchange rate target zone with imperfect credibility due to the gambler's ruin problem. However, low credibility and frequent realignments can destabilize the exchange rate

We present a simple behavioral model with chartists and fundamentalists and analyze their trading behavior in a floating regime and in a target zone regime. Regarding the floating regime the model replicates the well-known stylized facts like excessive volatility, fat tails, volatility...

Empirical work on exchange-rate behavior under a target-zone regime has used data produced by the European Monetary System (ENS) and has found that the data contradict important predictions made by the standard target-zone model. We argue that the contradictions reflect a misinterpretation of...

I show that parity realignments alone do not suffice to ensure the long-run sustainability of an exchange rate target zone with imperfect credibility due to the gambler's ruin problem. However, low credibility and frequent realignments can destabilize the exchange rate

Lera and Sornette (2016) derive an analytical expression for the conditional volatility of the (unobservable) economic fundamental in Krugman (1991)'s target zone model by locally inverting the relation between the exchange rate and its fundamental value, such that it can be modelled as a...