Economics, Econometrics and Finance
4 years ago

New study reveals how exchange rate management impacts monetary policy

The Warwick Economics Research Paper Series (TWERPS)
Exchange Rate Bands And Realignments In A Stationary Stochastic Setting
Marcus Miller, Paul Weller

Paper Summary

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The article explores how exchange rate management can work alongside independent monetary policy using a model with exchange rate bands. By adding stochastic elements to the model, the researchers analyze the effects of rules for adjusting the band when fundamentals deviate too much. They find that when a realignment is certain, the behavior of the exchange rate introduces hysteresis, leading to a more complex path for the exchange rate.