Beetsma, R. and van der Ploeg, F. (1994). Intramarginal interventions, bands and the pattern of EMS exchange rate distributions International Economic Review, 35(3):583--602.
JournalInternational Economic Review
The authors document an empirical puzzle for European Monetary System exchange rates during a period in which the bands on these exchanges rates were (almost) credible, i.e., exchange rate distributions are hump-shaped rather than U-shaped as predicted by the standard target zone model. The authors offer an explanation of this puzzle that is based on the combination of two realistic features, namely the presence of intramarginal interventions and wage/price sluggishness.