@article{Arcand:301525,
      recid = {301525},
      author = {Arcand, Jean-Louis L and Hari Kumar, Shekhar and Hongler,  Max-Olivier and Rinaldo, Daniele},
      title = {Can one hear the shape of a target zone?},
      address = {2023},
      number = {ARTICLE},
      abstract = {We develop an exchange rate target zone model with finite  exit time and non-Gaussian tails. We show how the tails are  a consequence of time-varying investor risk aversion, which  generates mean-preserving spreads in the fundamental  distribution. We solve explicitly for stationary and  non-stationary exchange rate paths, and show how both  depend continuously on the distance to the exit time and  the target zone bands. This enables us to show how central  bank intervention is endogenous to both the distance of the  fundamental to the band and the underlying risk. We discuss  how the feasibility of the target zone is shaped by the set  horizon and the degree of underlying risk, and we determine  a minimum time at which the required parity can be reached.  We prove that increases in risk beyond a certain threshold  can yield endogenous regime shifts where the “honeymoon  effects” vanish and the target zone cannot be feasibly  maintained. None of these results can be obtained by means  of the standard Gaussian or affine models. Numerical  simulations allow us to recover all the exchange rate  densities established in the target zone literature. The  generality of our framework has important policy  implications for modern target zone arrangements.},
      url = {http://repository.graduateinstitute.ch/record/301525},
      doi = {https://doi.org/10.1016/j.jmateco.2023.102852},
}