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)

Related works:
Working Paper: Exchange Rate Monitoring Bands: Theory and Policy (2002)
Working Paper: Exchange Rate Monitoring Bands: Theory and Policy (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:mmf:mmfc06:146

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