A target zone model with the terminal condition of joining a currency area

Ajevskis, Viktors

doi:10.1080/13504851.2010.534053

Cited by 6 publications

(3 citation statements)

References 5 publications

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“…In other words, the hypothesis that financial market participants traded in the EURCHF spot FX market, as if they were using the Krugman model throughout the period of interest, cannot be rejected. 49 The assumption of an infinite lifetime can nevertheless be replaced by a finite lifetime, as shown in Ajevskis (2011) and Lera and Sornette (2019). Ajevskis (2011) imposes a terminal condition for the spot FX rate (e.g.…”

Section: Infinite Lifetimementioning

confidence: 99%

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Foreign exchange interventions under a minimum exchange rate regime and the Swiss franc

Hertrich

2021

Rev International Economics

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In this paper, a structural model is proposed that allows monetary authorities to determine the size of foreign exchange market interventions that are expected to be necessary to implement a minimum exchange rate regime. An empirical application of the proposed model to the minimum exchange rate regime that the Swiss National Bank (SNB) implemented vis‐à‐vis the euro from September 2011 to January 2015 reveals that it is well suited to explain the actual size of these interventions and that, in January 2015, the SNB’s euro purchases might have been large without the abandonment of the minimum exchange rate regime, which is consistent with the official statements of the SNB in the aftermath of that episode.

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Section: Infinite Lifetimementioning

confidence: 99%

“…49 The assumption of an infinite lifetime can nevertheless be replaced by a finite lifetime, as shown in Ajevskis (2011) and Lera and Sornette (2019). Ajevskis (2011) imposes a terminal condition for the spot FX rate (e.g. a fixed euro conversion rate) at a finite future date.…”

Section: Infinite Lifetimementioning

confidence: 99%

Foreign exchange interventions under a minimum exchange rate regime and the Swiss franc

Hertrich

2021

Rev International Economics

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“…Bekaert and Gray (1998) and Lundbergh and Teräsvirta (2006) test the implications of the second-generation models, and find mixed evidence with a slight tendency towards the intramarginal interventions hypothesis. Ajevskis (2011) extended the basic target zone model to a finite termination time setting while maintaining the assumptions of the original model: it is the closest to our approach. Ajevskis (2015) extends his earlier contribution by considering the exchange rate to follow a mean-reverting Ornstein-Uhlenbeck (OU) process and compares the difference in exchange ratefundamental-target zone dynamics between the OU process and a Brownian motion.…”

Section: Existing Literature and Motivationsmentioning

confidence: 99%

Can one hear the shape of a target zone?

Arcand¹,

Hongler²,

Kumar³

et al. 2020

Preprint

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We develop a target zone model with realistic features such as finite exit time, nonstationary dynamics and heavy tails. Our rigorous characterization of risk corresponds to the dynamic counterpart of a mean-preserving spread. We explicitly solve for both stationary and transient exchange rate paths, and show how they are influenced by the distance to both the time horizon and the target zone bands. This enables us to show how central bank intervention is endogenous to both the distance of the fundamental to the band and the underlying risk. We discuss how the credibility of the target zone is shaped by the set horizon and the degree of underlying risk, and we determine a minimum time at which the required parity can be reached. We prove that the interplay of the diffusive component and the destabilizing risk component can yield an endogenous regime shift characterized by a threshold level of risk above which the target zone ceases to exist. All the previous results cannot obtain by means of the standard Gaussian and affine models. We recover by numerical simulations the different exchange rate densities established by the target zone literature.

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