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The defense of multilateral XR target zones against contagious crises

  • Jean-Sébastien Pentecôte

    (CREM, Universty of Rennes 1)

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    A growing literature has emerged to assess the importance and the channels of contagion during the recent currency crises which occured in the 1990s. However, little attention has been paid to the policy implications of the way to coordinate interventions in order to defend not only a single, but rather a given set of currencies altogether. To this end, a state-space model is built to describe the dynamics of many bilateral exchange rates. Using the Kalman filter, we check in particular the stability and the controllability of the system. The ERM evidence show that a successfull strategy heavily depends on both the time-horizon and the cost attached by the monetary authority to her interventions

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    File URL: http://repec.org/mmf2006/up.26363.1145541752.pdf
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    Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 85.

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    Date of creation: 02 Feb 2007
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    Handle: RePEc:mmf:mmfc06:85
    Contact details of provider: Web page: http://www.essex.ac.uk/afm/mmf/index.html

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    1. Edin, Per-Anders & Vredin, Anders, 1993. "Devaluation Risk in Target Zones: Evidence from the Nordic Countries," Economic Journal, Royal Economic Society, vol. 103(416), pages 161-75, January.
    2. Axel A. Weber, 1991. "Time-Varying Devaluation Risk, Interest Rate Differentials and Exchange Rates in Target Zones: Empirical Evidence from the EMS," Volkswirtschaftliche Diskussionsbeiträge 25-91, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
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