Exchange Rate Policy and the (Un) conditional Variance of the DM/$-Rate / Währungspolitik und die (un)konditionelle Varianz des DM/$-Kurses

Abstract

Summary In this paper a random walk model with a GARCH error term is estimated for daily exchange rate returns in the Deutsche Mark-U.S. dollar market for the period March 1985 to September 1988. Dummy variables are included in the model to identify changes in the statistical properties of DM/$-returns corresponding to shifts in the international coordination of exchange rate policies during the sample period. It is found that the enhanced policy coordination initiated by the Plaza Agreement of September 22,1985 was accompanied by a decline in both the conditional and the unconditional variance of daily DM/$-returns.