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The Simplest Test of Target Zone Credibility
Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies.
1990 (English)Report (Other academic)
Abstract [en]

A credible target zone regime with a given exchange rate band implies bounds on the amount of depreciation of the domestic currency. This implies, for given foreign interest rates, bounds on the domestic-currency rate of return on foreign investment: a rate-of-return band for each time to maturity. Whether domestic interest rates are outside theses rate-of-return bands can be used as a simple test of exchange rate credibility, under the assumption of sufficient international capital mobility. This test is applied to the Swedish target zone during February 1986 - February 1990.

Under the additional assumption of uncovered interest rate parity, an equivalent test is whether expected future exchange rates are outside the exchange rate band. In addition, the expected future exchange rates are used to give an estimate of the probability of future devaluations.

Place, publisher, year, edition, pages
Stockholm: IIES , 1990.
Series
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 469
Keyword [en]
exchange rates, target zones, credibility, devaluation risks, term structure, interest rate bands
National Category
Economics
Identifiers
URN: urn:nbn:se:su:diva-41773OAI: oai:DiVA.org:su-41773DiVA: diva2:337718
Available from: 2010-08-09 Created: 2010-08-09 Last updated: 2010-08-09Bibliographically approved

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Svensson, Lars E.O.
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CiteExportLink to record
Permanent link

Direct link
Cite
Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf