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Title:Exchange rates dynamics in a target zone: a heterogeneous expectations approach PDF Logo
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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