Currency Target Zones as Mirrored Options

Exchange Rate Dynamics in a Target Zone - A Heterogeneous Expectations Approach

This paper analyzes credibility in the Colombian exchange rate target zone. A model of imperfect credibility, in the spirit of Bertola and Svensson (1993) is derived, and is used to explain why the exchange rate in Colombia has remained for prolonged periods near the borders of the zone. The main feature of the model is that central parity depreciation expectations are endogenous with respect to the position of the exchange rate inside the target zone. The krugman(1991) perfectly credible setup turns out to be a particular case of this general model. One of the main implications of the model is that depreciation expectations increase rather than decrease as the exchange rate approaches the upper band. Hence a model as the one presented in this paper, is useful to explain the recent dynamics of interest rates in Colombia. It is also shown, that this model shares empirical features with the basic target zone model. Hence, policy makers might be misled when trying to recognize their credibility stance. A estructural estimation of the underlying parameters of the model, using McFadden's (1989) method of simulated moments, is suggested to identify the presence of non credibility issues. Econometric evidence suggest that Colombia's exchange rate target zone is properly described by a model of this nature.

An algorithmic approach to exchange rate stabilization

I examine authorities' interventions in goods and money markets to keep exchange rates within targeted zones, in an economy where both the exchange rate and the prices of goods are interdependent forward-looking variables. I show that, (1) in order to support target zones in both goods and money markets, there needs to be coordinated, simultaneous intervention in the two markets; (2) intervention takes place almost certainly before the exchange rate or the price level reaches its upper or lower bounds; and (3) zones for the exchange rate and for the price level cannot be separately designed as independent policy goals.

The paper aims to highlight the main difficulties on the monetary path towards the euro zone experienced by Emerging Europe. Emerging European Economies (EEEs), EU members, adopted either double shift or smooth transition monetary approach towards the euro zone. Double shift assumes changes from floating exchange rate regimes (ERRs) to the ERM II target zone and, finally, monetary union as a rigid ERR. The smooth transition is practiced by economies with mainly rigid ERRs before the ERM II entrance and, at the end, again rigid ERR of a monetary union. Despite chosen monetary path towards the euro zone, crucial difficulties or aggravating factors could be identified in the form of real exchange rate appreciation due to productivity growth or capital inflows. A reconciliation of inflation and exchange rate target zone is extremely complex, at the same time striving not to jeopardize the real convergence. What is stressed here is the vicious cycle between real and nominal convergence as the reason why the ERM II target should be regarded as a “waiting room“ not as a “training room“ in the pre-EMU phase.

Part 1 International policy co-ordination and exchange rate management: the European monetary system, exchange rate expectations and the reputation of authorities, P.Artus would US protectionism be a threat to economic stability?, A.J.Hughes Hallett and G.J.Huston international adjustment and the dollar - a game theoretic approach, J.C.Martinez Oliva exchange rates and policy co-ordination in an asymmetric model, P.Kennen international policy co-ordination, imperfect information and target zones, A.Bisin and P.Tedeschi target zones, currency options and the dollar, P.Weller. Part 2 Strategic aspects of international policy co-ordination: time inconsistency, discounting and the returns to co-operation, M.Miller, et al policy co-operation among benevolent governments may be undesirable - an extension, P.J.Kehoe can international policy co-ordination really be counterproductive?, C.Carraro and F.Giavazzi profit shifting motives and international trade union co-ordination, D.Laussel and A.Soubeyran. Part 3 Information and uncertainty: robust lyapunov games under bounded uncertainty, C.Diessenberg asymmetric information and policy co-ordination, M.Cripps international policy co-ordination in a world with model uncertainty, A.R.Ghosh and P.R.Masson.

As one of the important indicators of the global financial market, the fluctuation of the US dollar to Chinese yuan exchange rate not only directly affects the economic development of China and the United States, but also has important significance for analyzing the global economic situation. Analyzing the factors influencing the exchange rate between the United States dollar (USD) and the Chinese yuan (CNY) is one of the key research topics today. Researchers have found that exchange rates are influenced by factors such as national policies and the global political situation. However, there is still a certain gap in the comprehensive and objective analysis of these influencing factors. Therefore, the research topic of this article is to predict the trend of the exchange rate between the USD and the CNY and analyze the influencing factors. This study collected exchange rate data from January 2000 to November 2023 and used the ARIMA model to predict exchange rate changes. This study explores the trend of exchange rate changes by visualizing these data. Research has found that significant changes in exchange rates over the past two decades have also occurred during times of global instability and policy adjustments. The economic development level of China and the United States also directly affects the changes in exchange rates. In addition, the model used in this study also predicted the exchange rate between the USD and the CNY in 2024, providing a scientific direction for predicting the economic development trend in 2024.

Assessment on Valuation of RMB

On the mean-reverting properties of target zone exchange rates: Some evidence from the ERM

The discussion of target zones for flexible exchange rates is evidence of the desire to experiment with new instruments for stabilising the international monetary system. What distinguishes target zones from systems of flexible and fixed exchange rates? What form should they take? How should one regard the various objections to target zones?

An analytical approximation of target zone exchange rate functions: the technique of collocation

Like a fixed exchange rate, a target zone system may be subject to speculative attacks when the reserves of the central bank are limited. Thispaper analyzes such speculative attacks and their implications; it shows that the recently developed smooth pasting model of target zones should be viewed as a special case that emerges only when reserves are sufficiently large. The paper then uses the target zone framework to resolve a seeming paradox in predicting speculative attacks on a gold standard, arguing that such a standard may best be viewed as the boundary between one-sided target zones.

References and Further Reading

A majority of countries neither freely float their currencies nor firmly peg. But most of the remainder in practice also don’t obey such well-defined intermediate exchange rate regimes as target zones. This paper proposes to define an intermediate regime, to be called “systematic managed floating,” as an arrangement where the central bank regularly responds to changes in total exchange market pressure by allowing some fraction to be reflected as a change in the exchange rate and the remaining fraction to be absorbed as a change in foreign exchange reserves. An operational criterion for judging systematic managed floaters is a high correlation between exchange rate changes and reserve changes. The paper rejects the view that exchange rate regimes make no difference. In regressions to test effects on real exchange rates, we find that positive external shocks tend to cause real appreciation for most systematic managed-floaters; more strongly so for pure floaters; and not at all for most firm peggers. Two measures of exogenous external shocks are used: (i) for commodity-exporters, a country-specific index of global prices of the export commodities and (ii) for other Asian emerging market economies, the VIX.

This paper introduces an uncertain mean‐reverting currency model that incorporates floating domestic and foreign interest rates along with an exponential Ornstein–Uhlenbeck exchange rate process, all grounded in uncertainty theory. Pricing formulas for both Asian call and put options are derived within this framework. The parameters of the model are estimated using real financial data from Canada and the United States, including the Canadian Overnight Repo Rate Average (CORRA), the American Federal Funds Effective Rate (AFFER), and the monthly average exchange rate of the US Dollar to the Canadian Dollar (USDCAD). The method of moments is applied to estimate the unknown parameters, and goodness‐of‐fit tests are conducted to validate the parameter estimates. Numerical experiments demonstrate that Asian option prices decrease as domestic and foreign initial interest rates increase. The prices of call and put options show divergent behaviors with respect to the initial exchange rate and the fixed strike price. Additionally, the paper investigates the nonlinear relationship between option prices and expiration time. In the appendix, the uncertain currency model is transformed into a stochastic currency model, and statistical tests confirm its inapplicability to the selected data, thereby substantiating the choice of the uncertain currency model.