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Exchange Rate Bands with Point Process Fundamentals

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  • W. R. M. Perraudin

Abstract

This note derives closed form solutions for exchange rates in terms of fundamentals within a fully credible band exchange rate regime when the fundamentals are driven by Brownian motion and multiple point processes. The inclusion of point processes allows one to relax quite substantially the distributional assumptions about exchange rates implicit in models based on Brownian motions alone, and should therefore prove of use in empirical applications. Models with discontinuous driving processes also differ from the Brownian motion model in that monetary authorities will be obliged periodically to intervene on a large scale in discrete amounts.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 90/108.

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Length: 26
Date of creation: 01 Nov 1990
Date of revision:
Handle: RePEc:imf:imfwpa:90/108

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Cited by:
  1. Beetsma, Roel M. W. J., 1995. "EMS exchange rate bands: a Monte Carlo investigation of three target zone models," Journal of International Money and Finance, Elsevier, Elsevier, vol. 14(2), pages 311-328, April.
  2. Bertola, G. & Svensson, L.E., 1990. "Stochastic Devaluation Risk and the Empirical Fit of Target Zone Models," Papers, Stockholm - International Economic Studies 481, Stockholm - International Economic Studies.
  3. Svensson, Lars E. O., 1992. "The foreign exchange risk premium in a target zone with devaluation risk," Journal of International Economics, Elsevier, Elsevier, vol. 33(1-2), pages 21-40, August.
  4. Antoine Magnier, 1992. "Théorie des zones cibles et fonctionnement du SME," Économie et Prévision, Programme National Persée, Programme National Persée, vol. 104(3), pages 87-113.

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