Non-Linear Exchange Rate Dynamics in Target Zones: A Bumpy Road Towards A Honeymoon Some Evidence from the ERM, ERM2 and Selected New EU Member States
AbstractThis study investigates exchange rate movements in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS) and in the Exchange Rate Mechanism II (ERM-II). On the basis of Bessec (2003), we set up a three-regime self-exciting threshold autoregressive model (SETAR) with a non-stationary central band and explicit modelling of the conditional variance. This modelling framework is employed to model daily DM-based and median currency-based bilateral exchange rates of countries participating in the original ERM and also for exchange rates of the Czech Republic, Hungary, Poland and Slovakia from 1999 to 2004. Our results confirm the presence of strong non-linearities and asymmetries in the ERM period, which, however, seem to differ across countries and diminish during the last stage of the run-up to the euro. Important non-linear adjustments are also detected for Denmark in ERM-2 and for our group of four CEE economies.
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Date of creation: 01 May 2005
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target zone; ERM; non-linearity; SETAR.;
Other versions of this item:
- Jesús Crespo-Cuaresma & Balázs Egert & Ronald MacDonald, 2005. "Non-Linear Exchange Rate Dynamics in Target Zones: A Bumpy Road towards a Honeymoon - Some Evidence from the ERM, ERM2 and Selected New EU Member States," CESifo Working Paper Series 1511, CESifo Group Munich.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-05-23 (All new papers)
- NEP-EEC-2005-05-23 (European Economics)
- NEP-FIN-2005-05-23 (Finance)
- NEP-IFN-2005-05-23 (International Finance)
- NEP-MON-2005-05-23 (Monetary Economics)
- NEP-TRA-2005-05-23 (Transition Economics)
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