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A model for exchange rates with crawling bands: an application to the Colombian peso

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Brooks, C. and Revéiz, A. (2002) A model for exchange rates with crawling bands: an application to the Colombian peso. Journal of Economics and Business, 54 (5). pp. 483-503. ISSN 0148-6195

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To link to this article DOI: 10.1016/S0148-6195(02)00103-0

Abstract/Summary

This paper builds upon previous research on currency bands, and provides a model for the Colombian peso. Stochastic differential equations are combined with information related to the Colombian currency band to estimate competing models of the behaviour of the Colombian peso within the limits of the currency band. The resulting moments of the density function for the simulated returns describe adequately most of the characteristics of the sample returns data. The factor included to account for the intra-marginal intervention performed to drive the rate towards the Central Parity accounts only for 6.5% of the daily change, which supports the argument that intervention, if performed by the Central Bank, it is not directed to push the currency towards the limits. Moreover, the credibility of the Colombian Central Bank, Banco de la República’s ability to defend the band seems low.

Item Type:Article
Refereed:Yes
Divisions:Henley Business School > ICMA Centre
ID Code:24162
Uncontrolled Keywords:Exchange rate; Crawling band; Monetary policy
Publisher:Elsevier

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