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Exchange rate monitoring bands: theory and practice

Author

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  • Corrado, Luisa

    (University of Rome Tor Vergata)

  • Marcus Miller

    (University of Warwick)

  • Lei Zhang

Abstract

Recent empirical research 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

  • Corrado, Luisa & Marcus Miller & Lei Zhang, 2002. "Exchange rate monitoring bands: theory and practice," Royal Economic Society Annual Conference 2002 53, Royal Economic Society.
    • Handle: RePEc:ecj:ac2002:53
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    Cited by:

    1. Kevin C. Chua, 2018. "A Model Of Inflation Transmission In An Exchange Rate Target Zone," Bulletin of Economic Research, Wiley Blackwell, vol. 70(3), pages 285-297, July.

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