Scandinavian Working Papers in Economics
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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 533:
A time series model for an exchange rate in a target zone with applications

Stefan Lundbergh () and Timo Teräsvirta ()

Abstract: In this paper we introduce a flexible target zone model that is capable of characterizing the dynamic behaviour of an exchange rate implied by the original target zone model of Krugman (1991) and its modifications. Our framework also enables the modeller to estimate an implicit target zone if it exists. A modelling cycle consisting of specification, estimation, and evaluation stages is constructed. The model is fitted to series of daily observations of the Swedish and Norwegian currency indices and the estimated models are evaluated.

Keywords: Autoregressive conditional heteroskedasticity; exchange rate dynamics; nonlinear modelling; smooth transition autoregression; (follow links to similar papers)

JEL-Codes: C22; C52; F31; (follow links to similar papers)

37 pages, September 3, 2003

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This paper is published as:
Lundbergh, Stefan and Timo Teräsvirta, (2006), 'A time series model for an exchange rate in a target zone with applications', Journal of Econometrics, Vol. 131, pages 579-609

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