Target zone dynamics where the fundamental follows a SDE with periodic forcing

Ghassan Dibeh

Physica A: Statistical Mechanics and its Applications, 2006, vol. 363, issue 2, 437-445

Abstract: This paper investigates exchange rate and reserves dynamics in a target zone where the fundamental follows a stochastic differential equation with a periodic forcing function. Solutions to the model show that the target zone plays a stabilizing role but the dynamics of the exchange rate follow a family of S-shaped functions as time evolves. This dynamics cause the width of the target zone to be a varying function of time. It becomes what we can call a flexible target zone. The monetary authorities are then forced to hold not only large reserves but also varying reserves in order to properly defend the target zone.

Keywords: Speculative attacks; Target zones; Econophysics (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:363:y:2006:i:2:p:437-445

DOI: 10.1016/j.physa.2005.08.013

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