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2 edition of Stochastic process switching and intervention in exchange rate target zones found in the catalog.

Stochastic process switching and intervention in exchange rate target zones

Axel Weber

Stochastic process switching and intervention in exchange rate target zones

empirical evidence from the EMS

by Axel Weber

  • 325 Want to read
  • 30 Currently reading

Published by Centre for Economic Policy Research in London .
Written in English

    Subjects:
  • Foreign exchange -- Mathematical models.

  • Edition Notes

    StatementAxel A. Weber.
    SeriesDiscussion paper series / Centre for Economic Policy Research -- no.554
    ContributionsCentre for Economic Policy Research.
    The Physical Object
    Pagination43p. ;
    Number of Pages43
    ID Numbers
    Open LibraryOL19101303M

      In our set-up the agents know with certainty both the initial exogenous process and the new process to be adopted when the switch occurs. However, they do not know with certainty the timing of future switch as it depends on the path followed by the (stochastic) exchange rate. Stochastic switching systems represent an interesting class of systems that can be used to model a variety of systems having abrupt random changes in their dynamics. Such systems may be found in the fields of manufacturing, communications, aerospace, power, and economics. This work presents.

    Sustainable intervention policies and exchange rate dynamics Giuseppe Bertola, and Ricardo J. Caballero; Discussion Lars E. O. Svensson; Part V. Estimation and Testing: Estimation and testing in models of exchange rate target zones and process switching Gregor W. Smith, and Michael G. Spencer; Discussion Hossein Samiei.   Recently various exchange rate models capturing the dynamics during the transition from an exchange rate arrangement of floating rates into a currency union have been derived. Technically, these stochastic equilibrium models are diffusion processes which have to be estimated by discretely sampled observations. Using daily exchange rate data prior to the Greek EMU-entrance on 1 .

    Stochastic Devaluation Risk and the Empirical Fit of Target Zone Models Giuseppe Bertola, Lars E.O. Svensson. NBER Working Paper No. Issued in January NBER Program(s):International Trade and Investment Program, International Finance and Macroeconomics Program This paper proposes a tractable and realistic nonlinear model of exchange rate dynamics, and argues that its predictions are. The possibility of policy intervention in foreign exchange markets, however, may lead to stochastic process switching: in a perfectly credible target zone the commitment of policy-makers to intervene at the boundaries of a band for the fundamentals gives rise to speculative bubbles, which stabilize the exchange rate within a narrower band.


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Stochastic process switching and intervention in exchange rate target zones by Axel Weber Download PDF EPUB FB2

Axel A. Weber, "Stochastic Process Switching and Intervention in Exchange Rate Target Zones: Empirical Evidence from the EMS," Volkswirtschaftliche DiskussionsbeiträgeUniversität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.

Handle: RePEc:sie:siegenCited by: 8. The possibility of policy intervention in foreign exchange markets, however, may lead to stochastic process switching: in a perfectly credible target zone the commitment of policy-makers to intervene at the boundaries of a band for the fundamentals gives rise to speculative bubbles, which stabilize the exchange rate within a narrower : Axel A Weber.

For a full monetary intervention (γ=1), the expected rate of depreciation will be zero and the domestic interest rate will be equal to the foreign interest rate. Target zone. In a target zone, we know that the exchange rate is given by the function s(f). From, the interest rate differential is given by: (22) d f = s f −f by: 3.

This paper pioneers a Freidlin–Wentzell approach to stochastic impulse control of exchange rates when the central bank desires to maintain a target zone. Pressure to stimulate the economy forces. Stack Exchange network consists of Q&A communities including Stack Overflow, the largest, most trusted online community for developers to learn, share their knowledge, and build their careers.

Visit Stack Exchange. "Intramarginal Intervention in the EMS and the Target-Zone Model of Exchange-Rate Behavior," NBER Working PapersNational Bureau of Economic Research, Inc.

Flandreau, Marc, " The burden of intervention: externalities in multilateral exchange rates arrangements," Journal of International Economics, Elsevier, vol. 45(1), pages duce key features of empirical distributions of exchange rates within the band. The distribution generated by our model has more mass at the centre and less at the edges of the band than is the case for most other models.

Keywords: stochastic regime-switching, exchange rates, target zones. JEL numbers: F31, F41 ∗Corresponding author. Exchange rate target zones are better described as similar to managed floating regimes with intra-marginal interventions, with some marginal interventions when the exchange rate reaches the edges.

foreign exchange rate market are proportional to the size of the intervention (as in Avesani, ). They then find that the optimal policy is to stay within a given target zone, using marginal and infinitesimal interventions at the boundaries of the target zone in order to obtain a reflecting barrier.

zones survive among candidates for membership of the Euro zone who take part in the Exchange Rate Mechanism mark II. Exchange Rates Target Zones An Exchange Rate Target Zone is a scheme intended to limit the flexibility of an exchange rate without going as far as fixing or pegging the value of one currency against another.

It is a band, or zone. Introduction The research on target zone exchange rate regimes has progressed rapidly over the last few years.

With a target zone regime the exchange rate is allowed to move within a specified band, and it is then customary to assume that the central bank intervenes to prevent the exchange rate from moving outside the band. The exchange rate peg can thereafter no longer be defended. Another branch of the target zone literature (Bertola and Carballero () and Miller and Weller () looks at the situation when the stochastic process switch is from target zone to new target zone; i.e.

a realignment of the exchange rate peg rather than an abandonment of the peg. CiteSeerX - Document Details (Isaac Councill, Lee Giles, Pradeep Teregowda): We extend a target zone model to allow for occasional changes in the policy regime which change the stochastic process driving fundamentals.

A scenario we have in mind is that macroeconomic policy alternates between relatively tight and loose regimes. A key implication of our analysis is that occurrences which have. exchange rate target zones and process switching (Smith and Spencer, ).

The latter provide a model that is able to track the stochastic features of the exchange rate. Intervention in the exchange market was executed in order to avoid the rate crossing the limits imposed by the. target zone for the real exchange rate, which contained most of the ingredients in the later work on nominal exchange rate target zones.

A parallel literature on real investment under uncertainty, especially contributions by Avinash Dixit, was the source of many of the techniques used in the target zone literature (see Dixit,for a survey). This paper presents an endogenous switching regression model for the exchange rate process where the switch is defined by the central bank criteria functions for intervening.

the stochastic process for the exchange rate when it depends on interventions occur- 6 The Norwegian target zone until 19 October had a band equal to ±%. Stochastic Process Switching and Intervention in Exchange Rate Target Zones: Empirical Evidence from the EMS By Axel A. Weber Download PDF (2 MB).

During the s it has been clear that the controllability of the exchange rates by the central banks' interventions is limited (McKinnon, ). When the underlying monetary reserves are bounded, which in practice is the case, a target zone can never be credibly defended at the official borders of an announced zone.

A smooth exchange rate target zone solution that internalizes the time inconsistency problem and is completely free from speculation incentives exists where the monetary resources available for an exchange rate defense are limited and the target zone collapses with probability one.

In the unique closed form solution, a soft internal narrow target zone slides during a sterilized defense when. A Target Zone Exchange Rate Model with a Terminal Condition of Entering Currency Zone and the Fundamental driven by Ornstein-Uhlenbeck Stochastic Process The standard monetary exchange rate model was employed ([4]).

In the model it is assumed that exchange rate e(τ) depends on fundamental f(τ), and on expected change in the exchange rate. An intervention policy within target zone bands Stochastic Regime Switching 73 authorities at the boundaries. For future reference, The first regime is a switch from a floating exchange rate system to a fixed rate system.

In this case, when the exchange rate hits a given value, x".Exchange-rate dynamics under stochastic regime shifts A unified approach followed by Miller and Weller (), studies exchange-rate target zones; and Dixit (a), Dumas (a), Krugman (), and McDonald and Siegel () study the allocation of capital.

when a regime switch from (2) to some other process is possible. First, we. Interestingly, the threat of capital gains or losses induced by this stochastic intervention policy helps contain rates within implicit boundaries around the target level.

More importantly, this intervention policy concentrates observations of the exchange rate around the target level and away from the implicit bands.