This paper presents a method to test the volatility predictions of the textbook asset-pricing exchange rate model, which imposes minimal structure on the data and does not commit to a choice of exchange rate “fundamentals.” Our method builds on existing tests of excess volatility in asset...

This paper presents a method to test the volatility predictions of the textbook asset-pricing exchange rate model, which imposes minimal structure on the data and does not commit to a choice of exchange rate fundamentals. Our method builds on existing tests of excess volatility in asset prices,...

We present a model of a “soft” exchange rate target zone and interpret it as a stylized description of the post-August 1993 ERM. Our central bank targets a moving average of the current and past exchange rates, rather than the exchange rate’s current level, thus allowing the rate to move...