Working Paper: CEPR ID: DP3337
Authors: Luisa Corrado; Marcus Miller; Lei Zhang
Abstract: Recent empirical research by Mark Taylor and co-authors has found evidence of hybrid dynamics for real exchange rates. While there is a random walk near equilibrium, for real exchange rates some distance from equilibrium there is mean-reversion which increases with the degree of misalignment. An interesting question is whether this non-linear mean-reversion might be policy-induced. John Williamson (1998), for example, has proposed a ?monitoring band? in which there is no intervention near equilibrium but there is substantial intervention triggered by exchange rate deviations outside a preset band. In this Paper we develop a theoretical model of such a monitoring band to see whether it can generate patterns of non-linear mean-reversion akin to those reported in empirical research.
Keywords: monitoring band; near random walk dynamics; nonlinear mean-reversion
JEL Codes: D52; F31; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monitoring bands (E63) | exchange rate deviations (F31) |
| exchange rate deviations (F31) | mean-reversion dynamics (C22) |
| monitoring bands (E63) | mean-reversion dynamics (C22) |