Exchange rate monitoring bands: theory and practice

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

No 53, Royal Economic Society Annual Conference 2002 from Royal Economic Society

Abstract: Recent empirical research has found evidence of hybrid dynamics for the real exchange rate. 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 is 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 for a stylised monitoring band to see whether it can generate patterns of nonlinear mean-reversion akin to those reported in empirical research.

New Economics Papers: this item is included in nep-cba, nep-fmk and nep-ifn
Date: 2002-08-29

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