The Annual Meeting of the Finnish Statistical Society, Vaasa, 17-18 May 2001
Modelling an exchange rate in a target zone
Timo Teräsvirta, Stockholm School of Economics
Abstract: The topic of this lecture is econometric modelling of an exchange rate that is restricted to fluctuate within a band defined by the central bank. Economic theory for the behaviour of an exchange rate within such a band, also called a target zone, is discussed first. An existing empirical model (Bekaert and Gray, 1998) in which both the first and the second moment of the exchange rate are parameterized, is presented thereafter for comparison. This model can be compared to a new model called the Smooth Transition Autoregressive Target Zone (STARTZ) model. Somewhat different variants of the STARTZ model are discussed and the functioning of the model is considered in detail. The applicability of the STARTZ approach to modelling exchange rates in an implicit band is touched upon as well. The STARTZ model is applied to the Norwegian krone and Swedish krona, two currencies that fluctuated in a band a number of years in the 1980s and early 1990s, and the results discussed.
There is no paper available about the STARTZ model as yet, but an early account can be found in Chapter 5 of S. Lundbergh (1999), Modelling economic high-frequency time series. Stockholm: EFI, Stockholm School of Economics.