Quantitative modelling of the EUR/CHF exchange rate during the target zone regime of September 2011 to January 2015

Krugman (1991)'s target zone model has become the reference of a large part of this literature. Despite its simplicity and elegance, empirical evidence has been lacking. Deriving from Krugman's model analytical expressions for the conditional volatility and density distribution close to the target zone limit, we present clear and direct evidence that the bounded EUR/CHF exchange rate between September 2011 and January 2015 was quantitatively well described by Krugman's model. Krugman's target zone model holds after all, but apparently only under extreme and sustained pressure that pushes continuously the exchange rate very close to the boundary of the target zone