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Discussion Paper Series 1: Economic Studies, Deutsche Bundesbank >
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http://hdl.handle.net/10419/19688
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| Title: | | Exchange rate dynamics in a target zone: a heterogeneous expectations approach  |
| Authors: | | Bauer, Christian De Grauwe, Paul Reitz, Stefan |
| Issue Date: | | 2007 |
| Series/Report no.: | | Discussion paper Series 1 / Volkswirtschaftliches Forschungszentrum der Deutschen Bundesbank 2007,11 |
| Abstract: | | We present a simple behavioral model with chartists and fundamentalists and analyze their trading behavior in a floating regime and in a target zone regime. Regarding the floating regime the model replicates the well-known stylized facts like excessive volatility, fat tails, volatility clustering and the exchange rate disconnect. When introducing a credible target zone the exchange rate remains for a considerably long period in the center of the band albeit the fundamental exchange rate does not exhibit mean reversion tendencies. The resulting hump-shaped distribution of the exchange rate greatly reduces the frequency of central bank intervention. The introduction of a target zone regime significantly reduces exchange rate volatility by decreasing speculative activity in the FX market. |
| Subjects: | | Exchange rate heterogeneous agents target zones |
| JEL: | | F31 F41 |
| Appears in Collections: | | Discussion Paper Series 1: Economic Studies, Deutsche Bundesbank
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