Exchange Rates Dynamics in a Target Zone – A Heterogeneous Expectations Approach

Christian Bauer, Paul De Grauwe and Stefan Reitz

No 2080, CESifo Working Paper Series from CESifo

Abstract: The target zone model of Krugman (1991) has failed empirically. In this paper, we develop a model of the exchange rate with heterogeneous agents in a free floating and a target zone regime. We show that this simple model mimics the empirical puzzles of exchange rates: excessive volatility, fat tails, volatility clustering, and disconnection from the fundamentals. In addition, the target zone regime replicates a reduced nominal volatility for the same level of fundamental volatility as in the free floating regime and the distribution of the exchange rate within the band is hump-shaped.

Keywords: exchange rate; heterogeneous agents; target zones (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2007
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Related works:
Journal Article: Exchange rate dynamics in a target zone--A heterogeneous expectations approach (2009)
Working Paper: Exchange rate dynamics in a target zone: a heterogeneous expectations approach (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_2080

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