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Exchange rate monitoring bands: theory and practice

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  • Corrado, Luisa

    (University of Rome Tor Vergata)

  • Marcus Miller

    (University of Warwick)

  • Lei Zhang

Abstract

Recent empirical research 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.

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Bibliographic Info

Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2002 with number 53.

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Date of creation: 29 Aug 2002
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Handle: RePEc:ecj:ac2002:53

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