Exchange Rate Monitoring Bands: Theory and Policy

Luisa Corrado (), Marcus Miller () and Lei Zhang ()

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Recent empirical research by Mark Taylor and coauthors 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 nonlinear 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 nonlinear mean-reversion akin to those reported in empirical research.

Keywords: monitoring band; non-linear mean-reversion; near random walk dynamics (search for similar items in EconPapers)
JEL-codes: D52 F31 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-ifn
Date: 2002-04
Note: EM
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Related works:
Working Paper: Exchange Rate Monitoring Bands: Theory and Policy (2007)
Working Paper: Exchange Rate Monitoring Bands: Theory and Policy (2002)
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Persistent link: http://EconPapers.repec.org/RePEc:cam:camdae:0209

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