Corrado, Luisa, Miller, Marcus, 1941- and Zhang, Lei, Dr. (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))).

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Abstract

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
Date:	April 2002
Number:	No.333
Number of Pages:	37
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Funder:	University of Warwick
URI:	http://wrap.warwick.ac.uk/id/eprint/1698

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