at Google ScholarTitle data
Bauer, Christian ; de Grauwe, Paul ; Reitz, Stefan:
Exchange rate dynamics in a target zone : a heterogeneous expectations approach.
In: Journal of Economic Dynamics and Control.
Vol. 33
(2009)
Issue 2
.
- pp. 329-344.
ISSN 1879-1743
DOI: https://doi.org/10.1016/j.jedc.2008.05.008
Abstract in another language
We present a simple behavioral model with chartists and fundamentalists and analyze their trading behavior in both a floating and a target zone exchange rate regime. When applied to the floating regime, the model replicates the well-known stylized facts, such as excess volatility, fat tails, volatility clustering, and exchange rate disconnect. Our main result is that when applied to a credible target zone, our model predicts that the exchange rate remains in the center of the band for a considerable period, even though the fundamental exchange rate does not exhibit mean reversion tendencies. This is consistent with the empirical evidence and contrasts with the traditional target zone model based on Krugman [1991. Target zones and exchange rate dynamics. Quarterly Journal of Economics 16, 669–682], which predicts that the exchange rate in a target zone clusters close to the edges of the band. The hump-shaped distribution of the exchange rate obtained in our model greatly reduces the frequency of central bank intervention. We also conclude that the introduction of a target zone regime significantly reduces exchange rate volatility by decreasing speculative activity in the FX market.
Further data
| Item Type: | Article in a journal |
|---|---|
| Refereed: | Yes |
| Keywords: | Exchange rate; Heterogeneous agents; Target zones |
| Institutions of the University: | Faculties > Faculty of Law, Business and Economics > Department of Economics > Chair Economics I - International Economics and Finance > Chair Economics I - International Economics and Finance - Univ.-Prof. Dr. Bernhard Herz Faculties Faculties > Faculty of Law, Business and Economics Faculties > Faculty of Law, Business and Economics > Department of Economics Faculties > Faculty of Law, Business and Economics > Department of Economics > Chair Economics I - International Economics and Finance |
| Result of work at the UBT: | Yes |
| DDC Subjects: | 300 Social sciences > 330 Economics |
| Date Deposited: | 31 Mar 2015 08:56 |
| Last Modified: | 04 Jul 2022 11:28 |
| URI: | https://eref.uni-bayreuth.de/id/eprint/9534 |