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10.3. INFINITESIMAL MARGINAL INTERVENTION 3170.030.02s0.010-0.03 -0.02 -0.02 -0.01 0.00 0.00 0.01 0.01 0.02 0.02 0.03f-0.01G(f)-0.02s=f-0.03Figure 10.1: Relation between exchange rate and fundamentals underpure ßoat and Krugman interventionsEstimating and Testing the Krugman ModelDeJong [36] estimates the Krugman model by maximum likelihood andby simulated method of moments (SMM) using weekly data from January1987 to September 1990. He ends his sample in 1990 so thatexchange rates affected by news or expectations about German reuni-Þcation, which culminated in the European Monetary System crisis ofSeptember 1992, are not included.We will follow De Jong’s SMM estimation strategy to estimate thebasic Krugman model∆f t = η + σu t ,G t = αη + f t + Ae λ 1f t+ Be λ 2f t,where f = − ¯f, the time unit is one day (∆t =1),andu tiid∼ N(0, 1). λ 1and λ 2 are given in (10.34)-(10.35), and A and B are given in (10.38)