Target Zones Big and Small, Issue 3601
National Bureau of Economic Research, 1991 - Foreign exchange administration - 31 pages
Under different assumptions about the underlying monetary shocks, we study target zones of various widths and the effect they have on variables like the interest differential. The stochastic disturbances assumed are successively a non-zero mean random walk and a mean reverting process. The latter is used to incorporate the "leaning against the wind" policy (intrainarginal intervention) which is prevalent in the EMS.
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Abramowitz and Stegun APPENDIX assumption asymptotic behavior bounds on fundamentals Brownian motion Business Cycle central bank changing the width constant drift constant-trend constants of integration constructed by changing contains the fixed Delgado and Dumas demand shock diagonal line different widths differential equation domestic currency exchange rate band exchange rate curve exchange rate function extreme values figure is constructed fixed exchange points foreign exchange market free-float line interest differential interest rate differential intramarginal intervention Krueger Krugman limiting properties linear locus of tangencies marginal intervention mean reversion point mean reverting process money demand money supply narrow band Narrowing the band NBER NP^X Numerical values point FX Points below Sq properties of target relationship smooth pasting conditions solution speculative attacks stochastic stochastic differential Equation stochastic process supply shock Svensson tangencies implied TARGET ZONES BIG thick line unique currency values of parameters wide band Xavier Sala-i-Martin zones of different