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The distribution of exchange rates under a minimum exchange rate regime

Author

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  • Markus Hertrich

    (University of Basel and Deutsche Bundesbank)

Abstract

This paper adjusts the Chen and Giovannini (1992) me t h o d o l o g y to estimate the unconditional distribution of exchange rates under a one-sided target zone regime, where a central bank commits itself to intervene on foreign exchange markets to prevent its currency to move beyond a previously announced target level vis-à-vis a specific foreign currency. An application of this methodology to the 2011–2015 EUR/CHF minimum exchange rate regime shows that the Swiss National Bank presumably intervened only at (or very close to) the floor level of EUR/CHF 1.20 and not at a level significantly above that boundary. Hence, contrary to previous studies, the reported results accord with the predictions of the Krugman (1991) target zone model about the behavior of exchange rates, allowing investors to gain insights about the central bank’s policy function in extraordinary monetary situations and with important consequences for the descriptive validity of theoretical one-sided target zone models.

Suggested Citation

  • Markus Hertrich, 2016. "The distribution of exchange rates under a minimum exchange rate regime," Journal of Applied Economics, Universidad del CEMA, vol. 19, pages 351-362, November.
    • Handle: RePEc:cem:jaecon:v:19:y:2016:n:2:p:351-362
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    Citations

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    Cited by:

    1. Markus Hertrich, 2022. "Foreign exchange interventions under a minimum exchange rate regime and the Swiss franc," Review of International Economics, Wiley Blackwell, vol. 30(2), pages 450-489, May.
    2. Hertrich Markus, 2016. "The Costs of Implementing a Unilateral One-Sided Exchange Rate Target Zone," Review of Economics, De Gruyter, vol. 67(1), pages 91-120, May.
    3. Lu, You-Xun, 2022. "The stabilizing effect of the zero lower bound: A perspective of interest rate target zones," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 61-67.

    More about this item

    Keywords

    central banking; euro/Swiss franc floor; exchange rate distribution; minimum exchange rate regime; exchange rate target zone model;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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