International Finance Discussion Papers (IFDP)
October 1990
Is the EMS the Perfect Fix? An Empirical Exploration of Exchange Rate Target Zones
Robert P. Flood, Andrew K. Rose, and Donald J. Mathieson
Abstract:
In the context of a flexible-price monetary exchange rate model and the assumption of uncovered interest parity, we obtain a measure of the fundamental determinant of exchange rates. Daily data for the European Monetary System is then used to explore the importance of non-linearities in the relationship between the exchange rates and fundamentals. While some statistical evidence of non-linearities in conditional means of exchange rates is detected, these seem to have little economic content. A number of implications of existing "target zone" exchange rate models are tested; little support is found for existing models of limited exchange rate flexibility.
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