The width of the band and exchange rate mean-reversion: some further ERM-based results

One key prediction of the target zone model is that the exchange rate shoul d be mean-reverting within the band. In this paper we investigate this pred iction by examining the time series characteristics of seven currencies par ticipating in the Exchange Rate Mechanism (ERM) of the European Monetary Sy stem, both immediately before and after the introduction of wide exchange r ate bands in 1993. Using standard univariate unit root tests we find some e vidence of mean reversion, and this is much more pronounced using variance ratio test statistics. It turns out that such mean-reversion is as strong f or the wide band ERM as for the narrow band ERM. (C) 1999 Elsevier Science Ltd. All rights reserved.