Nominal Exchange Rate Dynamics in the European Monetary System

Michael G. Spencer

No 779, Working Paper from Economics Department, Queen's University

Abstract: The EMS is modeled as imposing dual reflecting barriers on the exchange rate process. This policy leads to a state-dependent conditional variance for exchange rate changes. This variance is always less than that under a pure free float regime. A method of Simulated Moments procedure is employed to estimate the parameters of the model. Simulations with the estimated parameter values show that the model predicts non-normality and non-stationarity in the distribution of exchange rate changes and that these characteristics diminish with aggregation.

Keywords: Browian motion; target zones; leptokurtosis; ARCH; Method of Simulated Moments (search for similar items in EconPapers)
Date: 1990-03
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:779

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