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Central bank intervenyion under target zones: the portuguese escudo in the ERM

Author

Listed:
  • Jorge Braga de Macedo
  • Luis Catela Nunes
  • Luis Brites Pereira

Abstract

For Portugal, the transition to the Euro began in September 1989 and featured three successive institutional arrangements related to the Exchange Rate Mechanism of the European Monetary System: shadowing it, belonging to it with 6% and then with 15% fluctuation bands. Using daily data, we study how the degree of mean reversion of the exchange rate and central bank intervention reflect the change in economic regime towards stability and convertibility. Our Markov regime-switching framework with an EGARCH specification allows for deviations from central party and intervention to affect the mean, the conditional variance and the state transition probabilities in the different policy regimes. Mean reversion is significant even when volatility is high in ERM-6, unlike central bank intervention, which almost disappears in ERM_15. Intervention affects the mean and the variance of the exchange rate when volatility is low, and the variance in ERM-S, even when volatility is high.

Suggested Citation

  • Jorge Braga de Macedo & Luis Catela Nunes & Luis Brites Pereira, 2003. "Central bank intervenyion under target zones: the portuguese escudo in the ERM," Nova SBE Working Paper Series wp435, Universidade Nova de Lisboa, Nova School of Business and Economics.
    • Handle: RePEc:unl:unlfep:wp435
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    Citations

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    Cited by:

    1. Lopes, José Mário & Nunes, Luis C., 2012. "A Markov regime switching model of crises and contagion: The case of the Iberian countries in the EMS," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1141-1153.
    2. Jorge Braga de Macedo, 2007. "A mudança do regime cambial português: Um balanço 15 anos depois de Maastricht," Nova SBE Working Paper Series wp502, Universidade Nova de Lisboa, Nova School of Business and Economics.
    3. Jorge Braga de Macedo & Luis Pereira & Afonso Reis, 2009. "Comparing Exchange Market Pressure across Five African Countries," Open Economies Review, Springer, vol. 20(5), pages 645-682, November.
    4. Bernardino Adão & Joaquim Pina, 2003. "The Portuguese Escudo in the ERM and the Efectiveness of the Exchange Rate Management," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    5. Jorge Braga de Macedo & José Braz & Luis Brites Pereira & Luis C. Nunes, 2006. "Exchange market pressure and the credibility of Macau's currency Board," Nova SBE Working Paper Series wp492, Universidade Nova de Lisboa, Nova School of Business and Economics.

    More about this item

    Keywords

    Central bank intervention; target zones; exchange rate mechanism; regime-switching;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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