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Please use this identifier to cite or link to this item: http://hdl.handle.net/2108/50

Title: Exchange monitoring bands: theory and policy
Authors: Corrado, Luisa
Miller, Marcus H.
Zhang, Lei
Keywords: monitoring band
non-linear mean-reversion
near random walk dynamics
Issue Date: Feb-2003
Publisher: CEIS
Series/Report no.: CEIS Tor Vergata Research Paper
8
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.
URI: http://ssrn.com/abstract=391480
http://hdl.handle.net/2108/50
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