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The Danish krone-euro exchange rate and Danmark Nationalbank intervention operations

  • Stefan Reitz EMAIL logo and Mark P. Taylor
Published/Copyright: March 26, 2013
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Studies in Nonlinear Dynamics and Econometrics
From the journal Studies in Nonlinear Dynamics and Econometrics Volume 17 Issue 3

Abstract

Although the ERM II rules allow the Danish krone to fluctuate against the euro within an official target zone of 4.5%, most of the time the exchange rate has remained in a narrow range around its unconditional mean. Estimating a Smooth Transition Autoregression Target Zone (STARTZ) model confirms that the exchange rate exhibits target zone dynamics consistent with a band of approximately 0.75% around its unconditional mean. We conclude that the Danmark Nationalbank intervention policy of intra-marginal operations successfully managed an informal target zone in the foreign exchange market.

Keywords: target zone; STARTZ model; intervention; JEL classification: E58;F31;G15
Corresponding author: Stefan Reitz, Institute for Quantitative Business and Economics Research, University of Kiel, Germany; and Kiel Institute for the World Economy, Kiel, Germany

We appreciate the helpful advice from an anonymous referee. We also thank Maria Gelman for excellent research assistance.

  1. 1

    For additional details regarding the ERM II and the Danish monetary and exchange rate policies see DNB (2003), ECB (2004), and Fatum and Pedersen (2009).

  2. 2

    See Sarno and Taylor (2003), pp. 179–181, for details.

  3. 3

    Sarno and Taylor (2003) and Taylor (1995) survey the target zone literature.

  4. 4

    Since the Danish krone was on average on the stronger side vis-à-vis the euro, we use the unconditional mean of the exchange rate (DKK 7.4431 per euro) instead of the official parity (DKK 7.46038 per euro). This is in line with the findings of Crespo-Cuaresmo, Egert and MacDonald (2005).

  5. 5

    Of course, the respective parameters in the transition function will be allowed to differ from those in the mean equation.

  6. 6

    Note that we derived robust standard errors for the estimated coefficients. This is important because conditional normality cannot be maintained. Under fairly weak regularity conditions, however, the resulting robust estimates are consistent even when the conditional distribution of the residuals is non-normal (Bollerslev and Wooldridge 1992).

  7. 7
  8. 8

    See Sarno and Taylor (2003), pp. 192–194.

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Published Online: 2013-03-26
Published in Print: 2013-05-01

©2013 by Walter de Gruyter Berlin Boston

Articles in the same Issue

  1. Masthead
  2. Masthead
  4. The Danish krone-euro exchange rate and Danmark Nationalbank intervention operations
  5. Common large innovations across nonlinear time series
  6. The forward rate premium puzzle: a case of misspecification?1)
  7. A smooth transition long-memory model
  8. Nonlinear causality tests and multivariate conditional heteroskedasticity: a simulation study
  9. Threshold linkages between volatility and trading volume: evidence from developed and emerging markets
  10. Inventory investment and the business cycle: the usual suspect
https://doi.org/10.1515/snde-2012-0016
Keywords for this article
target zone; STARTZ model; intervention; JEL classification: E58;F31;G15

Articles in the same Issue

  1. Masthead
  2. Masthead
  4. The Danish krone-euro exchange rate and Danmark Nationalbank intervention operations
  5. Common large innovations across nonlinear time series
  6. The forward rate premium puzzle: a case of misspecification?1)
  7. A smooth transition long-memory model
  8. Nonlinear causality tests and multivariate conditional heteroskedasticity: a simulation study
  9. Threshold linkages between volatility and trading volume: evidence from developed and emerging markets
  10. Inventory investment and the business cycle: the usual suspect
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