Empirical features of the second-generation target zone models: Mean-reverting fundamentals and endogenous devaluation riskKnot, K. H. W., Dijkstra, T. K. & de Haan, J., Jul-1999, In : Economic Inquiry. 37, 3, p. 489-509 21 p.
Research output: Contribution to journal › Article › Academic › peer-review
We show that within Bertola and Svensson's second-generation target zone model, mean-reverting interventions and endogenous devaluation risk are closely interrelated. Over the period 1983-93 we analyze the degree of mean reversion in the underlying fundamental process as well as the term structure of interest rate differentials vis-a-vis Germany for six Exchange Rate Mechanism currencies. For Austria, Denmark and the Netherlands, and for Belgium after 1990 our estimates are broadly in line with the first-generation target zone model, whereas those for France and Italy are in accordance with the model that allows for endogenous devaluation risk. (JEL F31, E43).
|Number of pages||21|
|Publication status||Published - Jul-1999|
- INTEREST-RATE DIFFERENTIALS, EXCHANGE-RATE, REALIGNMENTS, EXPECTATIONS, INTERVENTION, REVERSION, EMS