Working Paper: CEPR ID: DP382
Authors: Marcus Miller; Paul Weller
Abstract: Exchange rate behavior is analyzed in the context of a stochastic rational expectations model in which there are random shocks to the price setting mechanism and in which the authorities choose to impose either nominal or real exchange rate bands. Results are compared to those that emerge from a simple monetary model subject to velocity shocks. The effects of a realignment of the band, and of fiscal policy used in conjunction with monetary policy to defend the band, are also examined.
Keywords: currency bands; currency realignments; stochastic process; switching
JEL Codes: 431; 432
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nominal or real exchange rate bands (F31) | monetary policy (E52) |
| fiscal policy adjustments (E62) | exchange rates (F31) |
| periodic realignments of a nominal band (F33) | money stock adjustments (E51) |
| state-contingent fiscal policy (E63) | monetary policy effects (E52) |