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Intramarginal Interventions, Bands and the Pattern of EMS Exchange Rate Distributions

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  • Beetsma, Roel M W J
  • van der Ploeg, Frederick

Abstract

The authors document an empirical puzzle for European Monetary System exchange rates during a period in which the bands on these exchanges rates were (almost) credible, i.e., exchange rate distributions are hump-shaped rather than U-shaped as predicted by the standard target zone model. The authors offer an explanation of this puzzle that is based on the combination of two realistic features, namely the presence of intramarginal interventions and wage/price sluggishness. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 35 (1994)
Issue (Month): 3 (August)
Pages: 583-602

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Handle: RePEc:ier:iecrev:v:35:y:1994:i:3:p:583-602

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  1. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
  2. Svensson, L.E.O., 1989. "Target Zones And Interest Rate Variability," Papers 457, Stockholm - International Economic Studies.
  3. Lindbecg, H. Soderlind, P., 1992. "Target Zone Models and the Intervention Policy; The Swedish Case," Papers 496, Stockholm - International Economic Studies.
  4. Alan Sutherland, . "Monetary and Real Shocks and the Optimal Target Zone," Discussion Papers 92/7, Department of Economics, University of York.
  5. Miller M. & Weller, P., 1990. "Exchange Rate Bands With Price Inertia," The Warwick Economics Research Paper Series (TWERPS) 337, University of Warwick, Department of Economics.
  6. Sutherland, Alan, 1992. "Target Zone Models with Price Inertia: Some Testable Implications," CEPR Discussion Papers 698, C.E.P.R. Discussion Papers.
  7. Dornbusch, Rudiger, 1982. "PPP Exchange-Rate Rules and Macroeconomic Stability," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 158-65, February.
  8. Bertola, Giuseppe & Caballero, Ricardo J, 1992. "Target Zones and Realignments," American Economic Review, American Economic Association, vol. 82(3), pages 520-36, June.
  9. Alogoskoufis, George, 1991. "Monetary Accommodation, Exchange Rate Regimes and Inflation Persistence," CEPR Discussion Papers 503, C.E.P.R. Discussion Papers.
  10. Beetsma, R.M.W.J. & Ploeg, F. van der, 1992. "Exchange rate bands and optimal monetary accomodation under a dirty float," Discussion Paper 1992-13, Tilburg University, Center for Economic Research.
  11. Bertola, G. & Svensson, L.E., 1990. "Stochastic Devaluation Risk and the Empirical Fit of Target Zone Models," Papers 481, Stockholm - International Economic Studies.
  12. Miller, Marcus & Weller, Paul, 1989. "Solving Stochastic Saddlepoint Systems: A Qualitative Treatment with Economic Applications," CEPR Discussion Papers 308, C.E.P.R. Discussion Papers.
  13. Froot, Kenneth A. & Obstfeld, Maurice, 1991. "Exchange-rate dynamics under stochastic regime shifts : A unified approach," Journal of International Economics, Elsevier, vol. 31(3-4), pages 203-229, November.
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