Previous empirical evidence indicates that uncovered interest rate parity (UIP) does not hold for target zone exchange rates, like those in the European Monetary System and in the Nordic countries. We explore a target zone model where the market inferes the probability of a realignment of the...

Previous empirical evidence indicates that uncovered interest rate parity (UIP) does not hold for target zone exchange rates, like those in the European Monetary System and in the Nordic countries. We explore a target zone model where the market inferes the probability of a realignment of the...

The authors examine the interest rate differential between each of the four largest Nordic countries and the countries of their foreign currency baskets on monthly data for the period 1978/79-92. The interest rate differential is assumed to reflect devaluation expectations, which partly depend...