Working Paper: NBER ID: w3685
Authors: Andrew K. Rose; Lars E. O. Svensson
Abstract: An empirical model of time-varying realignment risk in an exchange rate target zone is developed. Expected rates of devaluation are estimated as the difference between interest race differentials and estimated expected rates of depreciation within the exchange rate band, using French Franc/Deutsche Mark data during the European Monetary System. The behavior of estimated expected rates of depreciation accord well with the theoretical model of Bertola-Svensson (1990) . We are also able to predict actual realignments with some success.
Keywords: exchange rates; realignment risk; uncovered interest rate parity
JEL Codes: F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| interest rate differential (i - f) (E43) | expected rate of devaluation (F31) |
| interest rate differential (i - f) (E43) | expected rate of depreciation within the band (E43) |
| expected rate of depreciation within the band (E43) | expected rate of devaluation (F31) |
| exchange rate position within the band (F31) | future expectations of depreciation and devaluation (F31) |