Testing Target-Zone Models Using Efficient Method of Moments.

The objectives of this article are threefold: (1) to test target zone models using more efficient and direct econometric methodology than previous research, (2) to identify an implicit band, if it exists, from observed data and to test target-zone models based on the estimated implicit band rather than the stated official band, and (3) to examine whether the exchange rate can be modeled as a managed float system with a central parity that lacks a band. We find strong evidence that a model with intramarginal intervention and a narrower implicit (unofficial) band can describe the dynamics of the French franc/Deutsche mark exchange rate from January I, 1987-July 30, 1993.