Advanced Search
MyIDEAS: Login to save this paper or follow this series

Soft exchange rate bands and speculative attacks: theory and evidence from the ERM since August 1993

Contents:

Author Info

  • Leonardo Bartolini
  • Alessandro Prati

Abstract

We present a model of a "soft" exchange rate target zone and interpret it as a stylized description of the post-August 1993 ERM. Our central bank targets a moving average of the current and past exchange rates, rather than the exchange rate's current level, thus allowing the rate to move within wide margins in the short run, but within narrow margins in the long run. For realistic parameters, soft target zones are significantly less vulnerable to speculative attacks than "hard" target zones. These predictions are consistent with the ERM's experience and the abatement of speculative pressure in European markets since the bands' widening in 1993.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.newyorkfed.org/research/staff_reports/sr43.html
Download Restriction: no

File URL: http://www.newyorkfed.org/research/staff_reports/sr43.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 43.

as in new window
Length:
Date of creation: 1998
Date of revision:
Handle: RePEc:fip:fednsr:43

Contact details of provider:
Postal: 33 Liberty Street, New York, NY 10045-0001
Email:
Web page: http://www.newyorkfed.org/
More information through EDIRC

Order Information:
Email:
Web: http://www.ny.frb.org/rmaghome/staff_rp/

Related research

Keywords: Foreign exchange rates ; European Monetary System (Organization);

Other versions of this item:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Dumas, B. & Svensson, L.E.O., 1991. "How Long do Unilateral Target Zones last?," Weiss Center Working Papers, Wharton School - Weiss Center for International Financial Research 1991-2, Wharton School - Weiss Center for International Financial Research.
  2. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(3), pages 669-82, August.
  3. Lars E. O. Svensson, 1992. "An Interpretation of Recent Research on Exchange Rate Target Zones," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 119-144, Fall.
  4. Svensson, L.E., 1990. "The Foreign Exchange Risk Premium in a Target Zone with Devaluation Risk," Papers, Stockholm - International Economic Studies 475, Stockholm - International Economic Studies.
  5. Flood, Robert P & Rose, Andrew K, 1993. "Fixing Exchange Rates: A Virtual Quest for Fundamentals," CEPR Discussion Papers, C.E.P.R. Discussion Papers 838, C.E.P.R. Discussion Papers.
  6. Lewis, Karen K, 1995. "Occasional Interventions to Target Rates," American Economic Review, American Economic Association, American Economic Association, vol. 85(4), pages 691-715, September.
  7. Labhard, Vincent & Wyplosz, Charles, 1996. "The New EMS: Narrow Bands inside Deep Bands," American Economic Review, American Economic Association, American Economic Association, vol. 86(2), pages 143-46, May.
  8. Hull, John & White, Alan, 1993. "One-Factor Interest-Rate Models and the Valuation of Interest-Rate Derivative Securities," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 28(02), pages 235-254, June.
  9. Michael W. Klein & Karen K. Lewis, 1991. "Learning About Intervention Target Zones," NBER Working Papers 3674, National Bureau of Economic Research, Inc.
  10. Klein, Michael W., 1992. "Big effects of small interventions: The informational role of intervention in exchange rate policy," European Economic Review, Elsevier, vol. 36(4), pages 915-924, May.
  11. Robert P. Flood & Andrew K. Rose & Donald J. Mathieson, 1990. "An Empirical Exploration of Exchange Rate Target-Zones," NBER Working Papers 3543, National Bureau of Economic Research, Inc.
  12. Delgado, Francisco & Dumas, Bernard, 1993. "Monetary contracting between central banks and the design of sustainable exchange-rate zones," Journal of International Economics, Elsevier, vol. 34(3-4), pages 201-224, May.
  13. Leonardo Bartolini & Alessandro Prati, 1997. "Soft versus hard targets for exchange rate intervention," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 12(24), pages 13-52, 04.
  14. Gilles, Christian & LeRoy, Stephen F, 1991. "Econometric Aspects of the Variance-Bounds Tests: A Survey," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 4(4), pages 753-91.
  15. Bartolini, Leonardo & Bodnar, Gordon M., 1992. "Target zones and forward rates in a model with repeated realignments," Journal of Monetary Economics, Elsevier, Elsevier, vol. 30(3), pages 373-408, December.
  16. Paul Krugman & Marcus Miller, 1992. "Exchange Rate Targets and Currency Bands," NBER Books, National Bureau of Economic Research, Inc, number krug92-1, October.
  17. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 11(3), pages 311-25, August.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Lundbergh, Stefan & Terasvirta, Timo, 2006. "A time series model for an exchange rate in a target zone with applications," Journal of Econometrics, Elsevier, Elsevier, vol. 131(1-2), pages 579-609.
  2. Miller, J. Isaac, 2011. "Testing the bounds: Empirical behavior of target zone fundamentals," Economic Modelling, Elsevier, vol. 28(4), pages 1782-1792, July.
  3. Nissanke, Machiko, 2003. "Revenue Potential of the Currency Transaction Tax for Development Finance: A Critical Appraisal," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  4. Frömmel, Michael & Garabedian, Garo & Schobert, Franziska, 2011. "Monetary policy rules in Central and Eastern European Countries: Does the exchange rate matter?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 33(4), pages 807-818.
  5. Eleftheriou, Maria & Gerdesmeier, Dieter & Roffia, Barbara, 2006. "Monetary policy rules in the pre-EMU era: Is there a common rule?," Working Paper Series, European Central Bank 0659, European Central Bank.
  6. Inci, Ahmet Can, 2005. "ERM effects on currency spot and futures markets," Global Finance Journal, Elsevier, vol. 16(2), pages 145-163, December.
  7. repec:onb:oenbwp:y:2004:i:1:b:1 is not listed on IDEAS

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:43. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Farber).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.