Exchange rate monitoring bands: theory and policy
Corrado, Luisa, Miller, Marcus and Zhang, Lei (2002) Exchange rate monitoring bands: theory and policy. Discussion Paper. London: Centre for Economic Policy Research (Great Britain). Discussion paper (Centre for Economic Policy Research (Great Britain)) (No.333).
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Recent empirical research by Mark Taylor and co-authors has found evidence of hybrid dynamics for real exchange rates. While there is a random walk near equilibrium, for real exchange rates some distance from equilibrium there is mean-reversion which increases with the degree of misalignment. An interesting question is whether this non-linear mean-reversion might be policy-induced. John Williamson (1998), for example, has proposed a ‘monitoring band’ in which there is no intervention near equilibrium but there is substantial intervention triggered by exchange rate deviations outside a preset band. In this Paper we develop a theoretical model of such a monitoring band to see whether it can generate patterns of non-linear mean-reversion akin to those reported in empirical research.
|Item Type:||Working or Discussion Paper (Discussion Paper)|
|Subjects:||H Social Sciences > HB Economic Theory|
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Random walks (Mathematics), Foreign exchange -- Mathematical models, Nonlinear theories, Equilibrium (Economics)|
|Series Name:||Discussion paper (Centre for Economic Policy Research (Great Britain))|
|Publisher:||Centre for Economic Policy Research (Great Britain)|
|Place of Publication:||London|
|Official Date:||April 2002|
|Number of Pages:||37|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Funder:||University of Warwick|
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