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Central bank intervenyion under target zones: the portuguese escudo in the ERM


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  • Macedo, Jorge Braga de
  • Nunes, Luis Catela
  • Pereira, Luis Brites


For Portugal, the transition to the Euro began in September 1989 and featured three successive institutional arrangements related to the Exchange Rate Mechanism of the European Monetary System: shadowing it, belonging to it with 6% and then with 15% fluctuation bands. Using daily data, we study how the degree of mean reversion of the exchange rate and central bank intervention reflect the change in economic regime towards stability and convertibility. Our Markov regime-switching framework with an EGARCH specification allows for deviations from central party and intervention to affect the mean, the conditional variance and the state transition probabilities in the different policy regimes. Mean reversion is significant even when volatility is high in ERM-6, unlike central bank intervention, which almost disappears in ERM_15. Intervention affects the mean and the variance of the exchange rate when volatility is low, and the variance in ERM-S, even when volatility is high.

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Bibliographic Info

Paper provided by Universidade Nova de Lisboa, Faculdade de Economia in its series FEUNL Working Paper Series with number wp435.

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Length: 43 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:unl:unlfep:wp435

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Related research

Keywords: Central bank intervention; target zones; exchange rate mechanism; regime-switching;

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Cited by:
  1. Macedo, Jorge Braga de, 2007. "A mudança do regime cambial português: Um balanço 15 anos depois de Maastricht," FEUNL Working Paper Series, Universidade Nova de Lisboa, Faculdade de Economia wp502, Universidade Nova de Lisboa, Faculdade de Economia.
  2. Jorge Braga de Macedo & Luis Pereira & Afonso Reis, 2009. "Comparing Exchange Market Pressure across Five African Countries," Open Economies Review, Springer, Springer, vol. 20(5), pages 645-682, November.
  3. Bernardino Adão & Joaquim Pina, 2003. "The Portuguese Escudo in the ERM and the Efectiveness of the Exchange Rate Management," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department, Banco de Portugal, Economics and Research Department.
  4. Lopes, José Mário & Nunes, Luis C., 2012. "A Markov regime switching model of crises and contagion: The case of the Iberian countries in the EMS," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(4), pages 1141-1153.
  5. Macedo, Jorge Braga de & Braz, José & Pereira, Luis brites & Nunes, Luis C., 2006. "Exchange market pressure and the credibility of Macau's currency Board," FEUNL Working Paper Series, Universidade Nova de Lisboa, Faculdade de Economia wp492, Universidade Nova de Lisboa, Faculdade de Economia.


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