| Abstract: | The purpose of this paper is to implement empirically a variant of the new theory of exchange-rate targeting, suitable for high-inflation, small, open economies. We formulate an expectations-induced relationship between the exchange rate and the fundamental, subject to random shocks and target-zone constraints on rates of depreciation. the empirical analysis provides estimates for the key parameters of the exchange-rate dynamic equation, and thereby identifies the unique roles played by policy variables and market fundamentals in foreign-exchange markets. |
