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Why Did Central Banks Intervene in the EMS? The Post 1993 Experience

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Author Info
Peter Brandner () (Institute for Advanced Studies, Vienna)
Harald Grech () (Oesterreichische Nationalbank, Economic Studies Division, Otto-Wagner Platz 3, POB 61, A-1011 Vienna)
Abstract

In this paper, we present stylized facts of exchange rate and intervention behavior in the Exchange Rate Mechanism I (ERM I), in particular in light of the recent literature on multilateral target zone models. We estimate bilateral exchange rate distributions of the maximum spot rate deviations of six ERM-currencies explicitly taking the multilateral setting of the ERM I into account. In a further analysis, we estimate short term reaction functions for the Banque de Belgique, the Danmarks Nationalbank, the Banco d’Espa˜na, the Banque de France, the Central Bank of Ireland and the Banco de Portugal by applying a Tobit analysis. The period under review ranges from August 1993 to April 1998. Daily exchange rate and intervention data are used. The exchange rate position in the band (deviation of the DEM-spot rates from the DEM-central parity) significantly induces intervention activity. There is less evidence that changes in volatility trigger central bank intervention.

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Publisher Info
Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 77.

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Length: 41 pages
Date of creation: 14 Oct 2002
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Handle: RePEc:onb:oenbwp:77

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Postal: P.O. Box 61, A-1011 Vienna, Austria
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Postal: Oesterreichische Nationalbank, Economic Studies Division, c/o Beate Hofbauer-Berlakovich, POB 61, A-1011 Vienna, Austria
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Related research
Keywords: Foreign Exchange Intervention; European Monetary System; Central Bank’s Reaction Function;

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Find related papers by JEL classification:
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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  1. Lucio Sarno & Mark P. Taylor, 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, vol. 39(3), pages 839-868, September. [Downloadable!] (restricted)
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  2. Kempa, Bernd & Nelles, Michael, 1999. " The Theory of Exchange Rate Target Zones," Journal of Economic Surveys, Blackwell Publishing, vol. 13(2), pages 173-210, April. [Downloadable!] (restricted)
  3. Jorgensen, Bjorn N. & Mikkelsen, Hans Ole ae, 1996. "An arbitrage free trilateral target zone model," Journal of International Money and Finance, Elsevier, vol. 15(1), pages 117-134, February. [Downloadable!] (restricted)
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  4. Beetsma, Roel M W J & van der Ploeg, Frederick, 1994. "Intramarginal Interventions, Bands and the Pattern of EMS Exchange Rate Distributions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 583-602, August. [Downloadable!] (restricted)
  5. Flandreau, Marc, 1996. "The Burden of Intervention: Externalities in Multilateral Exchange Rates Arrangements," CEPR Discussion Papers 1504, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August. [Downloadable!] (restricted)
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  7. Baillie, Richard T. & Osterberg, William P., 1997. "Why do central banks intervene?," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 909-919, December. [Downloadable!] (restricted)
  8. Dominquez, Kathryn M. & Kenen, Peter B., 1992. "Intramarginal intervention in the EMS and the target-zone model of exchange-rate behavior," European Economic Review, Elsevier, vol. 36(8), pages 1523-1532, December. [Downloadable!] (restricted)
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  9. Almekinders, Geert J & Eijffinger, Sylvester C W, 1994. "Daily Bundesbank and Federal Reserve Interventions: Are They a Reaction to Changes in the Level and Volatility of the DM/$-Rate?," Empirical Economics, Springer, vol. 19(1), pages 111-30.
  10. Chen, Zhaohui & Giovannini, Alberto, 1992. "Target zones and the distribution of exchange rates: An estimation method," Economics Letters, Elsevier, vol. 40(1), pages 83-89, September. [Downloadable!] (restricted)
  11. Buiter, Willem H & Corsetti, Giancarlo & Pesenti, Paolo, 1996. "Interpreting the ERM Crisis: Country-Specific and Systemic Issues," CEPR Discussion Papers 1466, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Eijffinger, S.C.W. & Verhagen, W.H., 1997. "The advantage of hiding both hands : foreign exchange intervention, ambiguity and private information," Discussion Paper 30, Tilburg University, Center for Economic Research. [Downloadable!]
  13. Honohan, Patrick, 1998. "A pitfall in computing exchange rate density in the EMS band," Journal of International Money and Finance, Elsevier, vol. 17(5), pages 839-853, October. [Downloadable!] (restricted)
  14. Almekinders, Geert J. & Eijffinger, Sylvester C. W., 1996. "A friction model of daily Bundesbank and Federal Reserve intervention," Journal of Banking & Finance, Elsevier, vol. 20(8), pages 1365-1380, September. [Downloadable!] (restricted)
  15. Honohan, Patrick, 1993. "The European Monetary System and the Theory of Target Zones," CEPR Discussion Papers 845, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  16. Flood, Robert P. & Rose, Andrew K. & Mathieson, Donald J., 1991. "An empirical exploration of exchange-rate target-zones," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 35(1), pages 7-65, January. [Downloadable!] (restricted)
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  17. Baillie, Richard T. & P. Osterberg, William, 1997. "Central bank intervention and risk in the forward market," Journal of International Economics, Elsevier, vol. 43(3-4), pages 483-497, November. [Downloadable!] (restricted)
  18. Serrat, Angel, 2000. "Exchange Rate Dynamics in a Multilateral Target Zone," Review of Economic Studies, Blackwell Publishing, vol. 67(1), pages 193-211, January.
  19. Lindberg, Hans & Soderlind, Paul, 1994. " Intervention Policy and Mean Reversion in Exchange Rate Target Zones: The Swedish Case," Scandinavian Journal of Economics, Blackwell Publishing, vol. 96(4), pages 499-513.
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