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    An empirical reassessment of target-zone nonlinearities

    Garratt, A. and Psaradakis, Zacharias and Sola, M. (2001) An empirical reassessment of target-zone nonlinearities. Journal of International Money and Finance 20 (4), pp. 533-548. ISSN 0261-5606.

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    In this paper we investigate the presence of target-zone nonlinearities in the Pound Sterling/German Mark exchange rate for the period of the UK European Exchange Rate Mechanism (ERM) membership using data with frequency of every 2 days. Tests against general nonlinear specifications as well as specifications consistent with a stochastic devaluation risk model of exchange rate target zones are carried out using recursive techniques. In addition, the significance of nonlinear effects is analysed within a recursive Bayesian framework. We find evidence of target-zone nonlinearities in the whole sample but the recursive analysis yields support for the presence of such nonlinearities only in specific subsamples. Our results imply that the reduction in the UK inflation rate was most likely a consequence of contractionary policies rather than of the expectational effects associated with the target zone.


    Item Type: Article
    School: Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School
    Depositing User: Sarah Hall
    Date Deposited: 21 Jul 2020 11:48
    Last Modified: 02 Aug 2023 18:01


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