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Non-Linear Exchange Rate Dynamics in Target Zones: A Bumpy Road Towards A Honeymoon Some Evidence from the ERM, ERM2 and Selected New EU Member States

Jes??s Crespo-Cuaresma (), Bal??zs ??gert () and Ronald MacDonald ()
Authors registered in the RePEc Author Service: Balázs Égert and Jesus Crespo Cuaresma ()

No wp771, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: This study investigates exchange rate movements in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS) and in the Exchange Rate Mechanism II (ERM-II). On the basis of Bessec (2003), we set up a three-regime self-exciting threshold autoregressive model (SETAR) with a non-stationary central band and explicit modelling of the conditional variance. This modelling framework is employed to model daily DM-based and median currency-based bilateral exchange rates of countries participating in the original ERM and also for exchange rates of the Czech Republic, Hungary, Poland and Slovakia from 1999 to 2004. Our results confirm the presence of strong non-linearities and asymmetries in the ERM period, which, however, seem to differ across countries and diminish during the last stage of the run-up to the euro. Important non-linear adjustments are also detected for Denmark in ERM-2 and for our group of four CEE economies.

Keywords: target zone; ERM; non-linearity; SETAR. (search for similar items in EconPapers)
JEL-codes: F31 G15 O10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-fin, nep-ifn, nep-mon and nep-tra
Date: 2005-05-01
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http://deepblue.lib.umich.edu/bitstream/2027.42/40157/3/wp771.pdf

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Working Paper: Non-Linear Exchange Rate Dynamics in Target Zones: A Bumpy Road towards a Honeymoon - Some Evidence from the ERM, ERM2 and Selected New EU Member States (2005) Downloads
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