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Bauer, Christian
De Grauwe, Paul
Reitz, Stefan
Year of Publication: 
Series/Report no.: 
Discussion Paper Series 1 2007,11
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.
Exchange rate
heterogeneous agents
target zones
Document Type: 
Working Paper

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