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The target zone model, non-linearity and mean reversion : is the honeymoon really over?
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Iannizzotto, Matteo and Taylor, Mark P. (1999) The target zone model, non-linearity and mean reversion : is the honeymoon really over? The Economic Journal, 109 (454). pp. 96-110. doi:10.1111/1468-0297.00419 ISSN 0013-0133.
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Official URL: http://dx.doi.org/10.1111/1468-0297.00419
Abstract
We estimate a target zone model for three ERM exchange rates for 1983–6 and 1987–91 by the method of simulated moments, taking account of the continuous time specification by using daily data with the interruptions of holidays and weekends. Specification tests are unable to reject the model. The estimates imply, however, an essentially linear relationship between the exchange rate and the fundamentals, with a very limited ‘honeymoon effect’. Using Monte Carlo simulations, calibrated on the estimates, we find that standard tests for mean reversion of the exchange rate would largely reject the target zone model when, in fact, it held.
Item Type: | Journal Article | ||||
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Divisions: | Faculty of Social Sciences > Warwick Business School | ||||
Journal or Publication Title: | The Economic Journal | ||||
Publisher: | Wiley-Blackwell Publishing Ltd. | ||||
ISSN: | 0013-0133 | ||||
Official Date: | 1999 | ||||
Dates: |
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Volume: | 109 | ||||
Number: | 454 | ||||
Page Range: | pp. 96-110 | ||||
DOI: | 10.1111/1468-0297.00419 | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Restricted or Subscription Access |
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