Why Did Central Banks Intervene in ERM I? The Post-1993 Experience
In this paper, we present stylized facts about exchange rate fluctuations and intervention behavior in the Exchange Rate Mechanism I (ERM I), in particular in light of the recent literature on multilateral target zone models. We estimate bilateral exchange rate distributions of the maximum spot rate deviations of six ERM I currencies, explicitly taking the multilateral setting of ERM I into account. In a further analysis, we estimate short-term reaction functions for the central banks of Belgium, Denmark, France, Ireland, Portugal, and Spain by applying a Tobit analysis. The period under review is from August 1993 to April 1998. We use daily exchange rate and intervention data. The exchange rate position in the band (deviation of the deutschemark (DEM) spot rates from the DEM central parity) significantly induces intervention activity. There is less evidence that changes in volatility trigger central bank intervention.
Volume (Year): 52 (2005)
Issue (Month): 1 (April)
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