Resource title

Exchange rate dynamics in a target zone: a heterogeneous expectations approach

Resource image

image for OpenScout resource :: Exchange rate dynamics in a target zone: a heterogeneous expectations approach

Resource description

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.

Resource author

Christian Bauer, Paul De Grauwe, Stefan Reitz

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Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/19688

Resource license

Adapt according to the presented license agreement and reference the original author.