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Exchange Rate Monitoring Bands: Theory and Policy

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

No 146, Money Macro and Finance (MMF) Research Group Conference 2006 from Money Macro and Finance Research Group

Abstract: Recent empirical research by Mark Taylor and coauthors 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

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)
Date: 2007-02-02
New Economics Papers: this item is included in nep-cba
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http://repec.org/mmf2006/up.18345.1148129205.pdf (application/pdf)

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Working Paper: Exchange Rate Monitoring Bands: Theory and Policy (2002) Downloads
Working Paper: Exchange Rate Monitoring Bands: Theory and Policy (2002) Downloads
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