EMS exchange rate bands: A Monte Carlo investigation of three target zone models

A Monte Carlo analysis is used to compare three target zone models in reproducing some stylized facts of weekly Deutsche mark exchange rates in the European Monetary System for the period January 1987-August 1992. The models are the standard target zone model, a model of infra-cum-intramarginal interventions, and a model of unfulfilled realignment expectations. Compared with the corresponding dollar rates, returns on Deutsche mark rates exhibit much more nonnormality, which can be generated endogenously by the latter two models, and more conditional heteroskedasticity, which can be produced simultaneously by the infra-cum-intramarginal interventions model.