Mean reversion in target zones: a re-examination of some ERM exchange rates
The theoretical literature on exchange rate behaviour in target zones predicts that the exchange rate would be mean reverting. This article empirically investigates this theoretical prediction in the case of the German mark bilateral exchange rates. Using a recently developed unit root test, this article provides evidence that is generally negative to the idea of mean reversion. It shows that all bilateral exchange rates under investigation appear to be unit root processes with the exception of the Dutch guilder/German mark rate.