Detecting undeclared target zones within the European Monetary System

G. Cavaliere
International agreements such as the European Monetary System require the exchange rates to lie inside target zones. In particular, when the bands are sufficiently large, monetary Authorities could intervene in order to defend a specific and generally undeclared target zone which is different from the institutional target zone. In this paper the existence of such undeclared target zones is investigated by developing a statistical procedure within the framework of the theory of reflected Brownian motions....