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ifo Institut – Leibniz-Institut für Wirtschaftsforschung an der Universität München >
CESifo Working Papers, CESifo Group Munich >
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http://hdl.handle.net/10419/26125
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| Title: | | Exchange rates dynamics in a target zone: a heterogeneous expectations approach  |
| Authors: | | Bauer, Christian De Grauwe, Paul Reitz, Stefan |
| Issue Date: | | 2007 |
| Series/Report no.: | | CESifo working paper 2080 |
| Abstract: | | The target zone model of Krugman (1991) has failed empirically. In this paper, we develop a model of the exchange rate with heterogeneous agents in a free floating and a target zone regime. We show that this simple model mimics the empirical puzzles of exchange rates: excessive volatility, fat tails, volatility clustering, and disconnection from the fundamentals. In addition, the target zone regime replicates a reduced nominal volatility for the same level of fundamental volatility as in the free floating regime and the distribution of the exchange rate within the band is hump-shaped. |
| JEL: | | F31 F41 |
| Document Type: | | Working Paper |
| Appears in Collections: | | CESifo Working Papers, CESifo Group Munich
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