Target Zones and Forward Rates in a Model with Repeated Realignments

Author/Editor:

Gordon M. Bodnar ; Leonardo Bartolini

Publication Date:

March 1, 1992

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper studies the implications of the imperfect credibility of an exchange rate target zone on the term structure of forward premia. The relationship between spot and forward exchange rates of different maturities reflects the possibility of repeated realignments of the exchange rate band. The credibility of the commitment to the target zone implicit in forward market data can be extracted by estimating the model. Application to French/German data indicates that the model is capable of matching observed patterns of interest rate differentials during the EMS, while yielding estimates of the credibility parameters that accord with the experience of the FF/DM exchange rate during the 1980s.

Series:

Working Paper No. 92/22

Subject:

English

Publication Date:

March 1, 1992

ISBN/ISSN:

9781451921199/1018-5941

Stock No:

WPIEA0221992

Format:

Paper

Pages:

54

Please address any questions about this title to publications@imf.org