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Why did Central Banks Intervenein the EMS? The Post 1993 Experience

In this paper, we present stylized facts of exchange rate 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-currencies explicitly taking the multilateral setting of the ERM I into account. In a further analysis, we estimate short term reaction functions for the Banque de Belgique, the Danmarks Nationalbank, the Banco d’Espa˜na, the Banque de France, the Central Bank of Ireland and the Banco de Portugal by applying a Tobit analysis. The period under review ranges from August 1993 to April 1998. Daily exchange rate and intervention data are used. The exchange rate position in the band (deviation of the DEM-spot rates from the DEM-central parity) significantly induces intervention activity. There is less evidence that changes in volatility trigger central bank intervention.

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Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 77.

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Length: 47
Date of creation: 14 Oct 2002
Date of revision:
Handle: RePEc:onb:oenbwp:77
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  1. Dominguez, Kathryn M., 1998. "Central bank intervention and exchange rate volatility1," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 161-190, February.
  2. Almekinders, Geert J & Eijffinger, Sylvester C W, 1994. "Daily Bundesbank and Federal Reserve Interventions: Are They a Reaction to Changes in the Level and Volatility of the DM/$-Rate?," Empirical Economics, Springer, vol. 19(1), pages 111-30.
  3. Baillie, Richard T. & P. Osterberg, William, 1997. "Central bank intervention and risk in the forward market," Journal of International Economics, Elsevier, vol. 43(3-4), pages 483-497, November.
  4. Honohan, Patrick, 1998. "A pitfall in computing exchange rate density in the EMS band," Journal of International Money and Finance, Elsevier, vol. 17(5), pages 839-853, October.
  5. Baillie, Richard T. & Osterberg, William P., 1997. "Why do central banks intervene?," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 909-919, December.
  6. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
  7. Lindberg, Hans & Soderlind, Paul, 1994. " Intervention Policy and Mean Reversion in Exchange Rate Target Zones: The Swedish Case," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(4), pages 499-513.
  8. Donald J. Mathieson & Robert P. Flood & Andrew K. Rose, 1991. "An Empirical Exploration of Exchange Rate Target-Zones," IMF Working Papers 91/15, International Monetary Fund.
  9. Kathryn Dominguez & Jeffrey A. Frankel, 1990. "Does Foreign Exchange Intervention Work?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 16, December.
  10. Flandreau, Marc, 1996. "The Burden of Intervention: Externalities in Multilateral Exchange Rates Arrangements," CEPR Discussion Papers 1504, C.E.P.R. Discussion Papers.
  11. Buiter, W.H. & Corsetti, G.M. & Pesenti, P.A., 1998. "Interpreting the ERM Crisis: Country-Specific and Systemic Issues," Princeton Studies in International Economics 84, International Economics Section, Departement of Economics Princeton University,.
  12. Almekinders, G.J. & Eijffinger, S.C.W., 1996. "A friction model of daily Bundesbank and Federal Reserve intervention," Other publications TiSEM 9ca974cc-1549-4752-8dbe-0, Tilburg University, School of Economics and Management.
  13. Sarno, Lucio & Taylor, Mark P, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective, and, If So, How Does It Work?," CEPR Discussion Papers 2690, C.E.P.R. Discussion Papers.
  14. Serrat, Angel, 2000. "Exchange Rate Dynamics in a Multilateral Target Zone," Review of Economic Studies, Wiley Blackwell, vol. 67(1), pages 193-211, January.
  15. Kathryn M. Dominguez & Peter B. Kenen, 1991. "Intramarginal Intervention in the EMS and the Target-Zone Model of Exchange-Rate Behavior," NBER Working Papers 3670, National Bureau of Economic Research, Inc.
  16. Kempa, Bernd & Nelles, Michael, 1999. " The Theory of Exchange Rate Target Zones," Journal of Economic Surveys, Wiley Blackwell, vol. 13(2), pages 173-210, April.
  17. Annesi Massimo & Ruffolo G. & D'Antoni S. & Macciotta G. & Pace C. & Sacchi C. & Sai M. & Solaroli B. & Baldassarri M. & Novacco N., 1998. "Interventi," Rivista economica del Mezzogiorno, Società editrice il Mulino, issue 2, pages 399-450.
  18. 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.
  19. Chen, Zhaohui & Giovannini, Alberto, 1992. "Target zones and the distribution of exchange rates: An estimation method," Economics Letters, Elsevier, vol. 40(1), pages 83-89, September.
  20. Honohan, Patrick, 1993. "The European Monetary System and the Theory of Target Zones," CEPR Discussion Papers 845, C.E.P.R. Discussion Papers.
  21. Jorgensen, Bjorn N. & Mikkelsen, Hans Ole ae, 1996. "An arbitrage free trilateral target zone model," Journal of International Money and Finance, Elsevier, vol. 15(1), pages 117-134, February.
  22. Anna J. Schwartz, 2000. "The Rise and Fall of Foreign Exchange Market Intervention," NBER Working Papers 7751, National Bureau of Economic Research, Inc.
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