Working Papers 2000 – Abstracts
4/2000
Bayesian Soft Target Zones.
Catherine S. Forbes and Paul Kofman
Several authors have postulated econometric models for exchange rates restricted
to lie within known target zones. However, it is not uncommon to observe exchange
rate data with known limits that are not fully 'credible'; that is, where some
of the observations fall outside the stated range. An empirical model for exchange
rates in a soft target zone where there is a controlled probability of the observed
rates exceeding the stated limits is developed in this paper. A Bayesian approach
is used to analyse the model, which is then demonstrated on Deutschemark-French
franc and ECU-French franc exchange rate data.
Keywords: Bayesian estimation, Griddy-Gibbs sampler, credible target
zones, soft margins, European Monetary System.
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