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Exchange Monitoring Bands: Theory and Policy

Author

Listed:
  • Luisa Corrado

    () (University of Rome II - Faculty of Economics)

  • Marcus H. Miller

    () (University of Warwick - Department of Economics)

  • Lei Zhang

    () (University of Warwick - Department of Economics)

Abstract

Recent empirical research by Mark Taylor and co-authors has found evidence of hybrid dynamics for the real exchange rate. While there is a random walk near equilibrium, for real exchange rates some distance from equilibrium there is mean-reversion which increases with the degree of misalignment. An interesting question is whether this nonlinear mean-reversion is policy-induced. John Williamson (1998), for example, has proposed a "monitoring band" in which there is no intervention near equilibrium but there is substantial intervention triggered by exchange rate deviations outside a preset band. In this paper we develop a theoretical model for a stylised monitoring band to see whether it can generate patterns of nonlinear mean-reversion akin to those reported in empirical research

Suggested Citation

  • Luisa Corrado & Marcus H. Miller & Lei Zhang, 2003. "Exchange Monitoring Bands: Theory and Policy," CEIS Research Paper 8, Tor Vergata University, CEIS.
  • Handle: RePEc:rtv:ceisrp:8
    as

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    References listed on IDEAS

    as
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    6. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
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    More about this item

    Keywords

    Monitoring Band; Non-linear Mean-Reversion; Near Random Walk Dynamics;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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