Target zones and forward rates in a model with repeated realignments
Journal of Monetary Economics
Vol. 30, 1992 Leonardo Bartolini
International Monetary Fund Gordon M. Bodnar
Simon School of Business, University of Rochester
Abstract This paper studies the term structure of forward premia in a target zone with imperfect credibility. The relationship between spot and forward exchange rates, which reflects the possibility of realignments of band, is studied for various intervention policies with different degrees of credibility. Forward market data is used to estimate the implied credibility of the French /German target zone during the EMS. Parameter estimates accord with the experience of the FFDM exchange rate during the 1980's. Although spot exchange rate display little sensitivity to anticipated intervention, forward data can be used to detect the effects of intervention on exchange rate dynamics.
| 
