Exchange rate monitoring bands: theory and policy

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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
Official Date: April 2002
Dates:
Date
Event
April 2002
Published
Number: No.333
Number of Pages: 37
Institution: University of Warwick
Status: Not Peer Reviewed
Access rights to Published version: Open Access (Creative Commons open licence)
Funder: University of Warwick
URI: https://wrap.warwick.ac.uk/1698/

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