Working Paper: CEPR ID: DP398
Authors: Giuseppe Bertola; Ricardo J. Caballero
Abstract: Recent contribution emphasize that the presence of exchange rate target zones has important effects on the within-band behaviour of exchange rates. We show that the implications of available models are strikingly inconsistent with European Monetary System data, and we propose a model of recurring realignments the predictions of which are consistent with the evidence.
Keywords: intervention; EMS; exchange rate volatility; expected depreciation
JEL Codes: 431; 432
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate fluctuations (F31) | exchange rate variability (F31) |
| credibility of intervention policies (D78) | exchange rate fluctuations (F31) |
| interest rate differentials (E43) | further depreciation of the lira or the franc (F31) |
| exchange rates approaching upper limit (F31) | further depreciation of the lira or the franc (F31) |
| market expectations about future interventions (E60) | exchange rate behavior (F31) |