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Intramarginal Interventions, Bands and the Pattern of EMS Exchange Rate Distributions

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  • Beetsma, Roel M W J
  • van der Ploeg, Frederick

Abstract

The authors document an empirical puzzle for European Monetary System exchange rates during a period in which the bands on these exchanges rates were (almost) credible, i.e., exchange rate distributions are hump-shaped rather than U-shaped as predicted by the standard target zone model. The authors offer an explanation of this puzzle that is based on the combination of two realistic features, namely the presence of intramarginal interventions and wage/price sluggishness. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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  • 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.
  • Handle: RePEc:ier:iecrev:v:35:y:1994:i:3:p:583-602
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    1. Alogoskoufis, George S, 1992. "Monetary Accommodation, Exchange Rate Regimes and Inflation Persistence," Economic Journal, Royal Economic Society, vol. 102(412), pages 461-480, May.
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    3. Miller, Marcus & Weller, Paul, 1991. "Exchange Rate Bands with Price Inertia," Economic Journal, Royal Economic Society, vol. 101(409), pages 1380-1399, November.
    4. Beetsma, R.M.W.J. & van der Ploeg, F., 1992. "Exchange rate bands and optimal monetary accomodation under a dirty float," Other publications TiSEM f552fec3-6451-416f-984c-b, Tilburg University, School of Economics and Management.
    5. Froot, Kenneth A. & Obstfeld, Maurice, 1991. "Exchange-rate dynamics under stochastic regime shifts : A unified approach," Journal of International Economics, Elsevier, vol. 31(3-4), pages 203-229, November.
    6. Sutherland, Alan, 1995. "Monetary and real shocks and the optimal target zone," European Economic Review, Elsevier, vol. 39(1), pages 161-172, January.
    7. Bertola, Giuseppe & Caballero, Ricardo J, 1992. "Target Zones and Realignments," American Economic Review, American Economic Association, vol. 82(3), pages 520-536, June.
    8. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 669-682.
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    Cited by:

    1. Kempa, Bernd & Nelles, Michael, 1999. "Nonfundamental FX trading and excess volatility in credible target zones Theory and empirical evidence," International Review of Economics & Finance, Elsevier, vol. 8(1), pages 55-70, January.
    2. Brandner, Peter & Grech, Harald & Stix, Helmut, 2006. "The effectiveness of central bank intervention in the EMS: The post 1993 experience," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 580-597, June.
    3. Bernd Kempa & Michael Nelles, 1999. "Misalignments of real exchange rates and the credibility of nominal currency bands," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 135(4), pages 613-628, December.
    4. Lai, Ching-chong & Fang, Chung-rou & Chang, Juin-jen, 2008. "Volatility trade-offs in exchange rate target zones," International Review of Economics & Finance, Elsevier, vol. 17(3), pages 366-379.
    5. Beetsma, Roel M. W. J. & van der Ploeg, Frederick, 1998. "Macroeconomic stabilization and intervention policy under an exchange rate band," Journal of International Money and Finance, Elsevier, vol. 17(2), pages 339-353, April.
    6. Bekaert, Geert & Gray, Stephen F., 1998. "Target zones and exchange rates:: An empirical investigation," Journal of International Economics, Elsevier, vol. 45(1), pages 1-35, June.
    7. Baghli Mustapha, 2005. "Nonlinear Error-Correction Models for the FF/DM Rate," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(1), pages 1-43, March.
    8. 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.
    9. Peter Brandner & Harald Grech, 2002. "Why did Central Banks Intervene in the EMS? The Post 1993 Experience," Working Papers 77, Oesterreichische Nationalbank (Austrian Central Bank).
    10. Peter Brandner & Harald Grech, 2002. "Why Did Central Banks Intervene in the EMS? The Post-1993 Experience," WIFO Working Papers 192, WIFO.
    11. António Portugal Duarte & João Sousa Andrade & Adelaide Duarte, 2013. "Exchange Rate Target Zones: A Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 27(2), pages 247-268, April.
    12. Alberto Carrasquilla & Arturo Galindo A., 1995. "Consideraciones Sobre El Comportamiento De La Tasa De Cambio Al Interior De Las Bandas," BORRADORES DE ECONOMIA 002190, BANCO DE LA REPÚBLICA.
    13. Mustapha Baghli, 2004. "Modelling the FF/MM rate by threshold cointegration analysis," Applied Economics, Taylor & Francis Journals, vol. 36(6), pages 533-548.
    14. Kempa, Bernd & Nelles, Michael & Pierdzioch, Christian, 1999. "The term structure of interest rates in a sticky-price target zone model," Journal of International Money and Finance, Elsevier, vol. 18(5), pages 817-834, October.
    15. Kempa, Bernd & Nelles, Michael, 1998. "On the Viability of Exchange Rate Target Zones in a Mundell-Fleming Model with Stochastic Output Shocks," Journal of Policy Modeling, Elsevier, vol. 20(5), pages 603-619, October.
    16. Orlowski, Lucjan T. & Rybinski, Krzysztof, 2006. "Implications of ERM2 for Poland's monetary policy," Economic Systems, Elsevier, vol. 30(4), pages 346-365, December.
    17. Alberto Carrasquilla, 1995. "Demanda por Reservas bajo Bandas Cambiarias," Borradores de Economia 029, Banco de la Republica de Colombia.

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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • E0 - Macroeconomics and Monetary Economics - - General
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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