Exchange rate dynamics in a target zone: a heterogeneous expectations approach

Christian Bauer, Paul De Grauwe and Stefan Reitz

No 2007,11, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

Abstract: We present a simple behavioral model with chartists and fundamentalists and analyze their trading behavior in a floating regime and in a target zone regime. Regarding the floating regime the model replicates the well-known stylized facts like excessive volatility, fat tails, volatility clustering and the exchange rate disconnect. When introducing a credible target zone the exchange rate remains for a considerably long period in the center of the band albeit the fundamental exchange rate does not exhibit mean reversion tendencies. The resulting hump-shaped distribution of the exchange rate greatly reduces the frequency of central bank intervention. The introduction of a target zone regime significantly reduces exchange rate volatility by decreasing speculative activity in the FX market.

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
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/19688/1/200711dkp.pdf (application/pdf)

Related works:
Journal Article: Exchange rate dynamics in a target zone--A heterogeneous expectations approach (2009)
Working Paper: Exchange Rates Dynamics in a Target Zone – A Heterogeneous Expectations Approach (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp1:5864

Access Statistics for this paper

More papers in Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().