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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

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  • Jesús Crespo-Cuaresma

    ()

  • Balázs Égert

    ()

  • Ronald MacDonald

    ()

Abstract

This 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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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp771.

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Length: pages
Date of creation: 01 May 2005
Date of revision:
Handle: RePEc:wdi:papers:2005-771

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Keywords: target zone; ERM; non-linearity; SETAR.;

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Cited by:
  1. Miller, J. Isaac, 2011. "Testing the bounds: Empirical behavior of target zone fundamentals," Economic Modelling, Elsevier, vol. 28(4), pages 1782-1792, July.
  2. Jesús Rodríguez López & Hugo Rodríguez Mendizábal, 2006. "The optimal degree of exchange rate flexibility: A target zone approach," Working Papers 06.22, Universidad Pablo de Olavide, Department of Economics.
  3. Lucjan Orlowski & Krzyzstof Rybinski, 2005. "Implications of ERM2 for Poland’s Monetary Policy," William Davidson Institute Working Papers Series wp802, William Davidson Institute at the University of Michigan.

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