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EMPIRICAL FEATURES OF THE SECOND‐GENERATION TARGET ZONE MODELS: MEAN‐REVERTING FUNDAMENTALS AND ENDOGENOUS DEVALUATION RISK
Author(s) -
Knot Klaas H. W.,
Dijkstra Theo K.,
Haan Jakob De
Publication year - 1999
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1999.tb01444.x
Subject(s) - devaluation , mean reversion , economics , exchange rate , econometrics , monetary economics
We show that within Bertola and Svensson's second‐generation target zone model, mean‐reverting interventions and endogenous devaluation risk are closely interrelated. Over the period 1983–93 we analyze the degree of mean reversion in the underlying fundamental process as well as the term structure of interest rate differentials vis‐à‐vis Germany for six Exchange Rate Mechanism currencies. For Austria, Denmark and the Netherlands, and for Belgium after 1990 our estimates are broadly in line with the first‐generation target zone model, whereas those for France and Italy are in accordance with the model that allows for endogenous devaluation risk. ( JEL F3 1, E43)