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Exchange Rates in Target Zones - Evidence from the Danish Krone

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  • Mark P. Taylor
  • Stefan Reitz

Abstract

Although the ERM II rules allow the Danish krone to fluctuate against the euro within an official target zone of 4.5%, most of the time the exchange rate has remained in a narrow range around its unconditional mean. Estimating a Smooth Transition Autoregression Target Zone (STARTZ) model confirms that the exchange rate exhibits target zone dynamics consistent with a band of approximately 0.75 percent around its unconditional mean. We conclude that the Danmark Nationalbank intervention policy of intra-marginal operations successfully managed an informal target zone in the foreign exchange market.

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1827.

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Length: 21 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:kie:kieliw:1827

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Keywords: Target Zone; STARTZ model; Intervention;

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References

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  1. 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.
  2. Sarno,Lucio & Taylor,Mark P., 2003. "The Economics of Exchange Rates," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521485845.
  3. Lundbergh, Stefan & Teräsvirta, Timo, 2003. "A time series model for an exchange rate in a target zone with applications," Working Paper Series in Economics and Finance 533, Stockholm School of Economics.
  4. Melvin, Michael & Taylor, Mark P., 2009. "The crisis in the foreign exchange market," Journal of International Money and Finance, Elsevier, Elsevier, vol. 28(8), pages 1317-1330, December.
  5. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 39(3), pages 839-868, September.
  6. Kempa, Bernd & Nelles, Michael, 1999. " The Theory of Exchange Rate Target Zones," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 13(2), pages 173-210, April.
  7. Klein, Michael W. & Lewis, Karen K., 1993. "Learning about intervention target zones," Journal of International Economics, Elsevier, Elsevier, vol. 35(3-4), pages 275-295, November.
  8. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
  9. Geert Bekaert & Stephen F. Gray, 1999. "Target Zones and Exchange Rates: An Empirical Investigation," NBER Working Papers 5445, National Bureau of Economic Research, Inc.
  10. Rasmus Fatum & Jesper Pedersen, 2007. "Real-Time Effects of Central Bank Interventions in the Euro Market," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 07-01, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  11. Anthony, Myrvin & MacDonald, Ronald, 1998. "On the mean-reverting properties of target zone exchange rates: Some evidence from the ERM," European Economic Review, Elsevier, Elsevier, vol. 42(8), pages 1493-1523, September.
  12. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 33(1), pages 13-47, March.
  13. Taylor, Mark P. & Iannizzotto, Matteo, 2001. "On the mean-reverting properties of target zone exchange rates: a cautionary note," Economics Letters, Elsevier, Elsevier, vol. 71(1), pages 117-129, April.
  14. Lars E. O. Svensson, 1992. "An Interpretation of Recent Research on Exchange Rate Target Zones," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 6(4), pages 119-144, Fall.
  15. De Jong , F., 1991. "A Univariate Analysis of EMS Exchange Rates Using a Target Zone Model," Papers, Tilburg - Center for Economic Research 9155, Tilburg - Center for Economic Research.
  16. Chung, Chae-Shick & Tauchen, George, 2001. "Testing Target-Zone Models Using Efficient Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 19(3), pages 255-69, July.
  17. Tristani, Oreste, 1994. " Variable Probability of Realignment in a Target Zone," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 96(1), pages 1-14.
  18. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
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