Exchange Monitoring Bands: Theory and Policy

35 Pages Posted: 8 Apr 2003

See all articles by Luisa Corrado

Luisa Corrado

University of Rome Tor Vergata Department of Economics and Finance

Marcus H. Miller

University of Warwick - Department of Economics; Institute for International Economics; Centre for Economic Policy Research (CEPR)

Lei Zhang

University of Warwick - Department of Economics

Date Written: February 2003

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.

Keywords: Monitoring Band, Non-linear Mean-Reversion, Near Random Walk Dynamics

JEL Classification: D52, F31, G12

Suggested Citation

Corrado, Luisa and Miller, Marcus H. and Zhang, Lei, Exchange Monitoring Bands: Theory and Policy (February 2003). CEIS Tor Vergata Research Paper Series No. 8. Available at SSRN: https://ssrn.com/abstract=391480 or http://dx.doi.org/10.2139/ssrn.391480

Luisa Corrado (Contact Author)

University of Rome Tor Vergata Department of Economics and Finance ( email )

Via Columbia n.2
Rome, rome 00100
Italy

Marcus H. Miller

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 3048/9 (Phone)
+44 24 7652 3032 (Fax)

Institute for International Economics

1750 Massachusetts Avenue, NW
Washington, DC 20036-1903
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Lei Zhang

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 2983 (Phone)
+44 24 7652 3032 (Fax)

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