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Intramarginal intervention in the EMS and the target-zone model of exchange-rate behavior

  • Dominquez, Kathryn M.
  • Kenen, Peter B.

Empirical work on exchange-rate behavior under a target-zone regime has used data produced by the European Monetary System (ENS) and has found that the data contradict important predictions made by the standard target-zone model. We argue that the contradictions reflect a misinterpretation of policies pursued by the ENS countries. They intervened intramarginally, to keep exchange rates well within the target zone, rather then intervening at the edges of the zone to prevent rates from crossing them. In the Besle-Nyborg Agreement of 1987, however, the ENS countries agreed to make fuller use of the band, and the effects of the agreement show up strongly in the data. Exchange rates behave differently after the agreement than they did before. The effect appears clearly in the behavior of the French franc and less decisively in the behavior of the Italian lira. The paper concludes by examining and rejecting alternative explanations for the observed differences in exchange-rate behavior.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 36 (1992)
Issue (Month): 8 (December)
Pages: 1523-1532

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Handle: RePEc:eee:eecrev:v:36:y:1992:i:8:p:1523-1532
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  1. Pesenti, P.A., 1990. "Perforate And Imperforate Currency Bands: Exchange Rate Management And The Term Structure Of Interest Rate Differentials," Papers 626, Yale - Economic Growth Center.
  2. Klein, Michael W. & Lewis, Karen K., 1993. "Learning about intervention target zones," Journal of International Economics, Elsevier, vol. 35(3-4), pages 275-295, November.
  3. Kathryn Dominguez and Jeffrey A. Frankel., 1990. "Does Foreign Exchange Intervention Matter? Disentangling the Portfolio and Expectations Effects for the Mark," Economics Working Papers 90-133, University of California at Berkeley.
  4. Giuseppe Bertola & Lars E.O. Svensson, 1991. "Stochastic Devaluation Risk and the Empirical Fit of Target Zone Models," NBER Working Papers 3576, National Bureau of Economic Research, Inc.
  5. 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.
  6. Svensson, Lars E. O., 1991. "The term structure of interest rate differentials in a target zone : Theory and Swedish data," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 87-116, August.
  7. Miller, Marcus & Weller, Paul, 1989. "Exchange Rate Bands and Realignments in a Stationary Stochastic Setting," CEPR Discussion Papers 299, C.E.P.R. Discussion Papers.
  8. Bertola, G. & Cabarello, R.J., 1990. "Target Zones And Realignments," Discussion Papers 1990_51, Columbia University, Department of Economics.
  9. Robert P. Flood & Peter M. Garber, 1989. "The Linkage Between Speculative Attack and Target Zone Models of Exchange Rates," NBER Working Papers 2918, National Bureau of Economic Research, Inc.
  10. Dominguez, Kathryn Mary, 1990. "Market responses to coordinated central bank intervention," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 32(1), pages 121-163, January.
  11. Jacob A. Frenkel & Morris Goldstein, 1986. "A Guide to Target Zones," NBER Working Papers 2113, National Bureau of Economic Research, Inc.
  12. Kenen, Peter B, 1987. "Exchange Rate Management: What Role for Intervention?," American Economic Review, American Economic Association, vol. 77(2), pages 194-99, May.
  13. Paul R. Krugman, 1987. "Trigger Strategies and Price Dynamics in Equity and Foreign Exchange Markets," NBER Working Papers 2459, National Bureau of Economic Research, Inc.
  14. Obstfeld, Maurice & Stockman, Alan C., 1985. "Exchange-rate dynamics," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 18, pages 917-977 Elsevier.
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