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Realignments of Target Zone Exchange Rate Systems: What Do We Know?
This article surveys recent work on forecasting realignments and estimating the credibility of target zones. The literature finds that realignments are somewhat predictable from readily available information such as interest rates and position of the exchange rate within the band. The relationship between realignment expectations and macrovariables is weak and uncertain. Realignments are said to ?surprise? policy makers and market participants; they can only be predicted a short time before they happen. Further work on the formation of expectations would<br /> be an important contribution to future research in this area. Additionally, the role of the U.S. dollar in ERM realignments is often noted but has not yet been incorporated into the estimation techniques.