Discussion Papers no. 160

Theory and Monte Carlo experiments

Noisy signals in target zone regimes

Publisert:

Åpne og les publikasjonen i PDF (27 sider)

Previous empirical evidence indicates that uncovered interest rate parity (UIP) does not hold for target zone exchange rates, like those in the European Monetary System and in the Nordic countries. We explore a target zone model where the market inferes the probability of a realignment of the band on the basis of a noisy signal. We show theoretically and through Monte Carlo simulations that if the market overrates the information content in the signal, then this may explain the empirical results obtained from testing UIP for target zone exchange rates.

Om publikasjonen

Tittel

Noisy signals in target zone regimes. Theory and Monte Carlo experiments

Ansvarlige

Steinar Holden, Birger Vikøren, Dag Kolsrud

Serie og -nummer

Discussion Papers no. 160

Utgiver

Statistics Norway, Research Department

Emne

Discussion Papers

Antall sider

27

Målform

Engelsk

Om Discussion Papers

Discussion papers comprise research papers intended for international journals and books. A preprint of a Discussion Paper may be longer and more elaborate than a standard journal article as it may include intermediate calculations, background material etc.

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