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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. JEL classification: E58, F31, F33

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Bibliographic 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
Date of revision:
Handle: RePEc:onb:oenbwp:77

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For corrections or technical questions regarding this item, or to correct its listing, contact: (Markus Knell and Helmut Stix).

Related research

Keywords: Foreign Exchange Intervention; European Monetary System; Central Bank’s Reaction Function;

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

References

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1. Beetsma, R.M.W.J. & Ploeg, F. van der, 1993. "Intramarginal interventions, bands and the pattern of EMS exchange rate distributions," Discussion Paper 1993-48, Tilburg University, Center for Economic Research.
   
   • 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.
2. Buiter, W.H. & Corsetti, G.M. & Pesenti, P.A., 1998. "Interpreting the ERM Crisis: Country-Specific and Systemic Issues," Princeton Studies in International Economics 84, International Economics Section, Departement of Economics Princeton University,.
   
   • W.H. Buiter & G Corsetti & P Pesenti, 1997. "Interpreting the ERM Crisis: Country-Specific and Systemic Issues," CEP Discussion Papers dp0321, Centre for Economic Performance, LSE.
   • 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.
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   • Jorgensen, B.N. & Mikkelsen, H.O., 1993. "An Arbitrage Free Trilateral Target Zone Model," Economics Working Papers 1993-17, School of Economics and Management, University of Aarhus.
4. Dominguez, Kathryn M., 1998. "Central bank intervention and exchange rate volatility1," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 161-190, February.
5. Almekinders, G.J. & Eijffinger, S.C.W., 1994. "Daily Bundesbank and federal reserve interventions: Are they a reaction to changes in the level and volatility of the DM/$-rate?," Open Access publications from Tilburg University urn:nbn:nl:ui:12-152910, Tilburg University.
   
   • 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.
6. Eijffinger, S.C.W. & Verhagen, W.H., 1998. "The advantage of hiding both hands: Foreign exchange intervention, ambiguity and private information," Open Access publications from Tilburg University urn:nbn:nl:ui:12-148278, Tilburg University.
   
   • Eijffinger, S.C.W. & Verhagen, W.H., 1997. "The Advantage of Hiding Both Hands: Foreign Exchange Intervention, Ambiguity and Private Information," Discussion Paper 1997-30, Tilburg University, Center for Economic Research.
   • Eijffinger, S.C.W. & Verhagen, W.H., 1998. "The advantage of hiding both hands: Foreign exchange intervention, ambiguity and private information," Open Access publications from Tilburg University urn:nbn:nl:ui:12-79071, Tilburg University.
7. Almekinders, G.J. & Eijffinger, S.C.W., 1996. "A friction model of daily Bundesbank and Federal Reserve intervention," Open Access publications from Tilburg University urn:nbn:nl:ui:12-73527, Tilburg University.
   
   • 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.
8. 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.
   
   • Sarno, Lucio & Taylor, Mark P, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective, and, If So, How Does It Work?," CEPR Discussion Papers 2690, C.E.P.R. Discussion Papers.
9. Kathryn M. Dominguez & Peter B. Kenen, 1993. "Intramarginal Intervention in the EMS and the Target-Zone Model of Exchange-Rate Behavior," NBER Working Papers 3670, National Bureau of Economic Research, Inc.
   
   • 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.
10. Flandreau, Marc, 1996. "The Burden of Intervention: Externalities in Multilateral Exchange Rates Arrangements," CEPR Discussion Papers 1504, C.E.P.R. Discussion Papers.
    
    • Flandreau, Marc, 1998. "The burden of intervention: externalities in multilateral exchange rates arrangements," Journal of International Economics, Elsevier, vol. 45(1), pages 137-171, June.
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.
    
    • 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.
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12. 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.
13. 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.
14. 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.
15. Lindberg, Hans & Soderlind, Paul, 1994. " Intervention Policy and Mean Reversion in Exchange Rate Target Zones: The Swedish Case," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(4), pages 499-513.
16. Kathryn Dominguez & Jeffrey A. Frankel, 1990. "Does Foreign Exchange Intervention Work?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 16, April.
17. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August.
    
    • Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
18. 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.
19. Kempa, Bernd & Nelles, Michael, 1999. " The Theory of Exchange Rate Target Zones," Journal of Economic Surveys, Wiley Blackwell, vol. 13(2), pages 173-210, April.
20. Honohan, Patrick, 1993. "The European Monetary System and the Theory of Target Zones," CEPR Discussion Papers 845, C.E.P.R. Discussion Papers.
21. Serrat, Angel, 2000. "Exchange Rate Dynamics in a Multilateral Target Zone," Review of Economic Studies, Wiley Blackwell, vol. 67(1), pages 193-211, January.

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