Central Bank Intervention Under Target Zones: the Portuguese Escudo in the ERM

• Autor(a) principal: Braga de Macedo, Jorge
• Data de Publicação: 2003
• Outros Autores: Nunes, Luis Catela, Brites Pereira, Luis
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10362/83495
• topic: Central Bank Intervention; Target Zones; Exchange Rate Mechanism; Regime-Switching

For Portugal, the transition to the Euro began in September 1989 and featured three successive institutional arrangement related to the Exchange Rate Mechanism of the European Monetary System: shadowing it, belonging to it with 6% and then with 15% fluctuation bands. Using daily data, we study how the degree of mean reversion of the exchange rate and central bank intervention reflect the change in economic regime towards stability and convertibility. Our Markov regime-switching framework with an EGARCH specification allows for deviations from central parity and intervention to affect the mean, the conditional variance and the state transition probabilities in the different policy regimes. Mean reversion is significant even when volatility is high in ERM-6, unlike central bank intervention, which almost disappears in ERM-15. Intervention affects the mean and the variance of the exchange rate when volatility is low, and the variance in ERM-S, even whem volatility is high.