Empirical Evidence on the Credibility of the USD/THB During
the Transition of the Thai Foreign Exchange Regime (in English)
Recent developments in the world foreign exchange market motivated this paper.The high volatility of the foreign exchange market in 1997 has caused several Asian countries to de facto devalue their currencies, or change their foreign exchange regimes, or even worse, reinforce their capital controls, thus reversing the liberalization of the world financial market. The credibility of currencies became questionable during such an extremely high volatile period in the foreign exchange market. We, therefore, are interested in measuring the credibility of such currencies during this high volatility period. On the academic front, the credibility of a currency has been studied thoroughly in the target zone literature. Several theoretical and empirical extensions of Krugmanus (1991) model have been conducted. Examples of papers that conduct tests of the credibility or estimate the realignment risk are Svensson (1991,1993), Bertola and Svensson (1993), Lindberg et al (1993), Rose and Svensson (1994), and Campa and Chang (1996). However, thest studies have focused only on European currencies. This study aims to study the credibility of the dollar/baht (USD/THB) during the period of high volatility in the foreign exchange market, and its implication on the uncovered interest rate parity. Recently, speculators have attacked the Thai foreign exchange market and, resulting in high volatility in the market and finally a change in its foreign exchange regime. The theoretical and empirical models in target zone studies, as well as the development in the Thai foreign exchange market, provide the opportunity to examine the credibility of the USD/THB.
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