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Were the peseta exchange rate crises forecastable during target zone period?

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Abstract:

During the 1990s several fixed or quasi-fixed exchange rate systems collapsed. Currency crises have happened in both developed and emerging countries so it is necessary to forecast and avoid them. However, financial market crises have been extremely difficult to forecast. Economic agents' expectations are nonobservable variables that cannot be ignored in the models. In addition, if it is required to study the European case during the 1990s, the censored disposition of the exchange rate cannot be ignored either. A discrete time target zones model is proposed where these aspects are taken into account. It will be tested in a peseta/deutsche mark exchange rate framework, from June 1989 to December 1998. The results indicate differences between before and after the shift in band widths in August 1993.

Document Type: Research Article

DOI: https://doi.org/10.1080/0003684032000081320

Affiliations: Universidad de Valladolid, Dpto. de Fundamentos del Análisis Económico, Avda Valle Esgueva, 6, E-47.011, Valladolid, Spain

Publication date: 2003-06-01

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