Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

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

Stefan Lundbergh () and Timo Teräsvirta ()
Additional contact information
Stefan Lundbergh: Skandia Life Insurance Company Ltd, Postal: SE-103 50 Stockholm, Sweden
Timo Teräsvirta: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

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

JEL-codes: C22; C52; F31

37 pages, September 3, 2003

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