Leading up to the global financial crisis, US dollar activity by global banks headquartered outside the United States played a crucial role in transmitting shocks originating in funding markets. Although post-crisis regulation has improved banking systems' resilience, US dollar funding remains a...

This paper investigates the validity of Covered Interest Rate Parity (CIP) in long-dated fixed income securities. I show that common measures of CIP in securities of longer maturities rely on trading strategies subject to rollover risk and credit risk, or fail to fully account for the trading...

This paper reviews some of the policy considerations behind modern target zone theory, pre-EMU. Topics covered include: domestic output boosting and switching; insulation and transmission of macroeconomic shocks; relationship with other exchange rate regimes; optimal currency areas; quot;rules...

This paper examines the behaviour of foreign exchange reserves, when a government defends an exchange rate target zone using Minimal Marginal Intervention. Reserve depletion defending a single exchange rate barrier is first modelled as the maximum or minimum value of the path of an unregulated...

This paper provides a short introduction to the topic of target zone exchange rate option pricing. Models covered include: Black-Scholes equation with derivation, European Call on a stock option, Garman-Kohlhagen model for an option on a free-floating exchange rate, Dumas Jennergren and Naslund...

This paper reviews and extends Dumas and Svensson's iconic 1994 model of the life expectancy of a unilateral target zone. Firstly, the underlying assumptions are examined and effects of real world phenomena such as bid-ask spreads considered. Secondly the data parameterization of their model is...

This paper surveys methods and models used in the target zone literature. The following areas are covered: rationale for stochastic modelling; Ito's Lemma and stochastic differential equations; the basic target zone model; the flexible price monetary model; simple real exchange rate zones;...

This paper uses a discrete simple random walk model to analyse the predicted behaviour of an exchange rate between formal or informal barriers. Various phenomena are examined including quot;secular attacksquot;, where the exchange rate appears to be attracted to and bounce repeatedly against a...

We propose a new model of exchange rates, which yields a theory of the forward premium puzzle. Our explanation combines two ingredients: the possibility of rare economic disasters, and an asset view of the exchange rate. Our model is frictionless, has complete markets, and works for an arbitrary...