Testing target-zone models using efficient method of moments
The objectives of this article are threefold - (1) to test target-zone models using more efficient and direct econometric methodology than previous research, (2) to identity an implicit hand, if it exists, from observed data and to test target-zone models based on the estimated implicit hand rather than the stated official band, and (3) to examine whether the exchange rate can be modeled as a managed float system with a central parity that lacks a band. We find strong evidence that a model with intramarginal intervention and a narrower implicit (unofficial) hand can describe the dynamics of the French franc/Deutsche mark exchange rate from January 1, 1987-July 30, 1993.
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