Can Exchange Rate Dynamics in Krugman's Target-zone Model be Directly Tested?
Publication in refereed journal



摘要Despite Krugman's (1991) model being a benchmark for modelling target zones, empirical support has been sparse due to the subtle non-linear relationship between the observable exchange rate and underlying unobservable fundamental. This paper provides an alternative approach to derive explicit exchange rate dynamics by approximating a quadratic relationship between the exchange rate and fundamental through a power-series method. The exchange rate dynamics with a parametric class of drift terms of the stochastic fundamental including constant-trend, symmetric and asymmetric mean-reverting forces regarding how central banks intervene are ready for direct empirical tests. The empirical results demonstrate that the derived dynamics following a mean-reverting square-root or double square-root processes adequately fits the exchange rate data of various target-zone systems including the Exchange Rate Mechanism. The model parameters of the exchange rate dynamics under the asymmetric mean-reverting fundamental are shown to be associated with realignment of the currencies' target zones.
著者C.H. Hui, C.F. Lo, P.H. Chau
期刊名稱Hong Kong Institute For Monetary Research Working Paper Series
出版社Hong Kong Institute for Monetary Research

上次更新時間 2018-18-01 於 11:18